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View Full Version : Dumb question. How can I forecast sales?



Jen
10-08-2012, 05:26 PM
Sorry for the dumb questions, but how can I forecast income statements, balance sheets, cash flow statements, and capital expenditure budgets for my business plan? It seems almost impossible since there is no guarantee in what my business will make.

Harold Mansfield
10-08-2012, 06:45 PM
Sorry for the dumb questions, but how can I forecast income statements, balance sheets, cash flow statements, and capital expenditure budgets for my business plan? It seems almost impossible since there is no guarantee in what my business will make.
It's all bull. Anything you put on a sheet before you have any sales is completely made up from a best guess, hope, and comparisons to existing businesses that that generally don't take into account expenditures to achieve their numbers.

Most business plans are based on, "This company/industry is doing this much in sales. If we can get this percentage of that, we'll make this". All you are doing is setting targets and goals and hopefully a plan to reach them to show how realistic those goals are. Even investors know that those numbers are completely made up.

You can get a possible idea by doing market research. It's better than guessing, but even if you do it on a massive scale, it's still not as accurate it being on the marketplace. People that participate in market research know they are part of a focus group. So you really can't be totally sure until you hit the market and start seeing what the response is from real people who are free to completely ignore you.

nealrm
10-08-2012, 07:15 PM
At best you are making an educated guess. My suggestion do your research and then cut your sales in half and double your expenses.

Harold Mansfield
10-08-2012, 07:18 PM
....and then cut your sales in half and double your expenses.
Yep. That's about the most accurate thing you will ever put in a business plan.

Freelancier
10-08-2012, 08:37 PM
A business plan -- and accounting statements forecasting the future -- is not reality, but it's an awesome exercise in seeing whether you have thought of everything. And you haven't. No one ever thinks of everything going into a new business. It's just not possible, because weird stuff ALWAYS happens at the worst possible moment. For example, no one ever puts in the business plan what's going to happen if they fall down the stairs and are in a cast for 3 months.

BUT, the exercise is really important, because it forces you to think about the numbers, think about how you're going to get to the numbers, think about what drives the numbers, think about all the things that can go wrong... and it gives you a way to know whether you're on target or falling behind your goal.

So... start with a sales goal you think you can attain. Is it 1000 widgets or 10,000 widgets next year? Then take that goal and figure out how you can acquire the necessary pieces to build those widgets, sell those widgets, deliver those widgets, service those widgets when they break in shipping, etc. Step by step. Once you have that, you'll have the numbers for your statements.

Harold Mansfield
10-08-2012, 09:00 PM
Here's Aaron Patzer founder of Mint.com talking about start up costs. About 12 minutes in he eludes to the fact that revenue projections are complete bullsh*t, but he does tell how to he came up with the numbers.



http://vimeo.com/6960507

bostonou
10-08-2012, 09:04 PM
Sorry for the dumb questions, but how can I forecast income statements, balance sheets, cash flow statements, and capital expenditure budgets for my business plan? It seems almost impossible since there is no guarantee in what my business will make.

First off, I don't think this is a dumb question at all. :)

Secondly, please take my answer with a heaping table spoon of salt. I've been studying businesses for a few years now, but I'm only in the early stages of venturing out to start my own. Hopefully some of the others that are experts can weigh in as well.

My first step would be to start with sales. Sales cover the two things you need to do:
1) Pay your business expenses
2) Make a profit

There's a technique called CVP analysis (Cost, Volume of Sales, and Profit) that is straightforward to do and very helpful IMO. The point of CVP analysis is to start with things more under your control (and therefore easier to estimate) and then generate the required amount of sales from that. It changes the question from "What are your sales going to be?" to "Do you expect sales to be at least $X?" It's a relatively simple formula:

Required Sales = (Planned fixed costs + Planned profit) / Planned contribution per $1 sale

Let's go over each one of those individually:

Planned fixed costs - This is how much you plan to spend, regardless of how much sales are. This could include things like rent, advertising, etc. Since you're just starting out, nealrm's advice to double your expected expenses seems like a good idea.

Planned profit - How much money would you like to make? If you are taking investments or willing to take a loss while you are building the business, this could be a negative number.

Planned contribution per $1 sale - This is the hardest to figure out, but you have control over this. It is simply the amount of money you'll make per sale. You calculate it as the cost to make the sale subtracted from the revenue of the sale.

That may seem daunting, but it's easier explained through an example:

Let's say I run a shoe store.

Fixed expenses are $1,100:
- Rent: $1,000
- Advertising: $100

I'd like to make $1,000 in profit.

Shoes cost $30 wholesale and I donate $10 to charity for every sale ($40 total cost for the sale). I've decided to sell them for $100 each. My contribution per sale would then be $60, or $.60 per $1.

($1,100 + $1,000) / $.60 = $3,500

So to cover my expenses and make my desired profit, I'd need to have sales of $3,500. The question "Do I think I can make sales of $3,500?" is a much easier question to answer than "What do I think sales are going to be?" If the required sales seems to high, then I know I either need to lower my expected profit, raise prices ($200 shoes!), or find a way to lower my fixed costs.

I hope that's helpful. I really like discussing these things, so if this is helpful and you'd like to discuss more, just let me know. We can either talk off the message board (message me for my email) or on the board. I'd prefer on the board so others can learn with us and the experts can weigh in with their opinions.

These types of questions are exactly what I'm trying to address with Lemonade Stand. Thanks for asking your question, because it's helpful for me to think about! :cool:

ArcSine
10-09-2012, 10:53 AM
Jen, if I were opening a Mickey D's at some particular site, the franchisor could tell me with a fair degree of accuracy what my expected revenues will be. McDonald's Corp has poured an ocean of cash into market research and economics studies, and they have the accumulated data of 10s of thousands of operating franchisees. Before I flip my first burger they already understand a lot about the area around my projected site, from population densities and demographics, to which products will sell and which won't, to the sales volume I'll likely experience.

I get that you're not opening a franchise burger joint, but the point is that maybe you can steal a page from their playbook. Look around for trade organizations for your particular business. If you were to be making widgets, say, you might find The National Association of Widget Makers, and The Widget-Makers Guild of North America. Most businesses and industries have such associations, and in many cases their membership fees are pretty reasonable. These organizations, more or less depending on their size and sophistication, usually spend some coin on pretty good market research and econ studies which they make available to their members. They'll have a mound of data compiled from their membership, supplemented with external (government) studies. The bigger outfits will have some economists on the payroll doing the number-crunching (an acquaintance of mine is an economist for one of the larger industry associations, and the quality of their research output is impressive).

However, none if this supersedes the caveats already given in this thread. You will be faced with a high degree of uncertainty with respect to your sales numbers, and I'm just offering something that might help tame that beast, and likely only by a bit. As already pointed out, there's no getting around the fact that projecting your revenues will be very difficult, and once you open the doors all bets are off.

For your purposes, that means a couple of important things. For one, recognize that many of your budgets---such as for capital expenditures and facilities, for personnel and compensation planning, and so on---are significantly dependent on your sales forecasts (as you've already noted). This in turn means that you have to build these "dependent" budgets dynamically; that is, create 'em in such a way that as you run different scenarios through your sales projections (to see how far and wide things might range (blow up?) under different assumptions) these dependent budgets automatically adjust accordingly. Modeling your budgets and forecasts in spreadsheets, or using some simple budgeting & planning software, is an ideal way to do this.

For another thing, very generally and roughly speaking, the higher the uncertainty, the more you want to use short-term and variable costs as opposed to longer-term and fixed costs. Some of the "classics"...
• Pay sales people on a commission that's linked to sales, rather than on a fixed salary.
• Lease rather than own.
• Sign shorter contracts rather than longer-lived ones.
• Use more equity financing and less debt financing. (Loan payments are fixed, and the bank doesn't care if your net cash flow bounces all over the board month to month. Equity investors, on the other hand (particularly of the "friends and family" variety), understand that their payouts will vary in tandem with the bottom line.)

A little more expensive, yeah, but it's all about managing your risks. And that means, in part, having expenditures which float somewhat in proportion to your revenues, and those which you can scale (up or down) on short notice. Later on, when and as the biz gains traction and begins proving itself, you can carefully migrate over to having more fixed and longer-type expenses in your mix, with correspondingly less short-term and variable stuff, as the fixed / long stuff tends to be cheaper money, on average, that its variable / short counterparts.

Best of success with the venture, Jen.