Is it possible for start ups to accurately forecast sales?
I'm in the middle of putting together a financial plan, organizing our budget, and trying to predict our sales for the first quarter. Is it possible for start ups to accurately forecast their sales? If so, what is the best way we can do this or how close can we come to an accurate prediction?
What do you need the forecast for? Financing? Daily planning? Are you only forecasting sales? Once your forecasting is done, what then? What happens if you don't do the forecasting? After three months, what will you do? Are you forecasting multiple scenarios?
I hope the answers to these questions allow you to choose your next steps.
1. get industry reports on your industry and look at the numbers of others.
2. use a financial planner that makes it as easy as possible to estimate sales and all related things.
3. For both 1 and 2 simply go to my profile and visit our website.
@Rema: Unfortunately, Karen Steinhoff's definition of 'SWOT analysis' is half-wrong. It is correct about the 'S' and 'W' (strengths and weaknesses) being INternal to the company, in this case a start-up. However, the 'OT' (opportunities and threats) are EXternal to the company/start-up.
Knowledgeable professionals conduct that external analysis at two levels, and they do it BEFORE they deal with strengths and weaknesses and a sales forecast. The first external level is the 'macroenvironment'--six remote forces over which an individual company has little, if any, control. There is risk in the macroenvironment, however, so you have to take stock of the six forces that constitute it.
The second level is the 'competitive domain'. Some might call this 'industry analysis,' but that is usually a misnomer because few small companies or start-ups compete industry-wide. Instead, they compete in industry segments that are usually constrained by geography. The strategy literature calls these 'strategic groups'. The mechanics of the analysis are about the same as those of an industry analysis, except the focus is narrower.
Until about five years ago, most domain-type analyses were done using Michael Porter's five-forces framework (google it). Starting in 2010, though, many analysts added a sixth force to that analysis--Complements; in our own shop, we added it in 2005.
One penultimate comment about the 'OT' aspects of SWOT analysis: whether one is analyzing the macroenvironment or the domain, the unit of analysis is the same: it is the domain itself, NOT the individual competitor--in this case, your start-up. That is, ALL competitors within a given domain face the same Opportunities and Threats. It is how each company deals with those--its Strengths and Weaknesses--that really tells the story.
My last comment about SWOT analysis is this: SWOT analysis is a crucial aspect of sales forecasting, esp. as that analysis relates to competitors, how they compete, their cultures, how they're organized, how they sell, to what segment(s), etc. I recommend that you conduct the SWOT analysis BEFORE you try to put the sales forecast together. It will provide context for your sales forecast and it should reduce the variance between what you forecast and what actually happens.
Once you've done your SWOT analysis, which is top-down--macronenvironment, then domain--build your forecast bottom-up. If it's a 'B2B' start-up, for instance, talk to prospective customers and build the sales forecast, customer by customer. It's not easy, but it CAN be done. If it's a B2C business, then the forecast is more difficult AND the analysis of competitors even more important than it would otherwise be, which, in terms of your credibility w/potential capital-providers, is plenty important already. In the B2C context, you should try to get sales-tax figures for the market area you're serving. In some states, it's possible to get those broken down between B2B and B2C. Talk to someone whose specialty is 'econometrics' at an area university; forecasting is what econometricians do.
Do NOT write something like, "The national market for this product (or service) is a bazillion dollars every year, and we're going to get at least 1% of that our first year in business," and then you multiply the market by 1%, divide by 12, and you have monthly sales expectations. DON'T DO THAT. Investors and bankers will laugh you out of town. Your forecast must have some underlying rationale. It has to make logical sense. How that forecast is constructed depends on the type of business it is. Unless you are willing to describe what kind of business you're starting, what your target market is, and what you believe your start-up's primary competitive advantage is, I can't be more specific.
As for 'accurate', well, there's this: all forecasts are WRONG. The only question is by how much. There's never been a perfect operating budget (which includes a sales forecast, incidentally) in the private sector, and there never will be. But the closer the forecast is to what actually happens, then the more confidence capital-providers will have about whether they should invest in or lend to your start-up.
Hope this helps, Rema.
There is nothing like accurate forecast!
Forecast is just a forecast like Bernadette Boas explained. It's almost impossible to consider and control all the scenarios and factors that will affect your actual sales. How your execute your strategy, how your sales team works, what impact government policies will have, what your competition is about to blast, you will never be able to predict all these factors in advance.
The right approach is to forecast and then as you work, monitor and make adjustments.
Hi Rema, I agree with many of the previous comments SWOT is good, plus seasons and some of the other aspects.
Can I say to you.
As a Start up, you should not focus on the 1st qtr. The chances of you getting it right is like trying to predict which team will be ahead and by how much at the end of the first qtr of a game. Simply you will not get it right. there is not enough history for you to make even a guess.
For start ups, the best approach is to work out your expenditure, Fixed and variable.
Then work out your selling price. This can be based on your competitive pricing so you do have some type of gauge. From this you can work out your Break Even point.
Then you can take that data across 12 months and estimate your required average Sales $ or units that must be sold each month to keep afloat.
Anything above that is a bonus.
Until you get some history, you will need a bench mark. and you will need a plan.
It is good to see that this is what you are doing.
The thing is you also need to attach it to tangible things. Your BE point becomes your tangible anchor.
Hope this helps.
I would suggest that you establish the baseline in your forecasting process. .
Start with forecasting your burn rate, ie the monthly expenses that you need to commit to ensure your organisation is running. From there, you ascertain the income you need to generate to break even.
Breakdown each sales process to assess if the sales is achievable. Or assess your current marketing strategy support that sales target.
In most cases, startups will more likely be revewing and adjusting their sales strategis and marketing plan to achieve the desired results, and the forecasts are reviewed and adjusted monthly.
However, if your preparing your financial plan for Angels Investors or VCs, a different approach will be employed as the investors are assessing your organisation from a different perspective, which carries more weight than your financial forecast.
All the best.
Probably not on your own, but if you involve a "think tank" of top pros with tons of experience, they might be able to analyze the market and your potential for you.
Sales Validation: set up a web site and see if you can capture credit card information. This is the simple answer. If you get traction move forward if not you may not have that good of an idea. Asking friends if they would buy means nothing if they don't open their wallet! Good luck! Be strong be brave.
Rema: As everyone has said, forecasting is speculation at best but you can reduce the degree of guess work with some in-market research. This applies in both B-B and B-C scenarios. I suggest the following:
1. Defining your target market ensuring that the variables you use (demographic, psychographic, etc,) are quantifiable. Often, these data can be gotten from census bureau, industry reports, local government statistics.
2. Concept testing by going into the market with samples, using members of your target market as respondents, and with core questions to determine the price/volume sensitivity curve associated with your offering. This process gives you an initial answer to 2 important questions: Is your target receptive to the product? and at what price should you be introducing the product.
Other issues e.g. sales cycle characteristics, competition, customer recognition of the value proposition assocated with your offering, your marketing program, number of decision makers etc. all will influence how rapidly your entry will succeed.
The more intense your test marketing, the more confidence you can have in your numbers.
Karen's answer is "spot on." Once you have the SWOT analysis completed, you can begin to develop your business plan knowing what your product or service excels at and what improvement areas could be developed. Your demographics will also provide additional details to include in your business plan. For example, is your product specific to one area of the country, state, community, etc. Or is your product perishable that will expire if shipped over long distances or time?
Do you know how many "widgets" or your product you need to reach a sales goal of X? How many leads do you need to get the right number of prospects that turn into Y number of clients?
I believe that once you go through these meaningful exercises and develop a sound business plan, you should be able to forecast - with some degree of accuracy your sales projections.
My start up business experience clearly shows that it is impossible to do so. Considering a variety of business factors you may be able to define a worst and best case frame and use it as a decision guideline for staying in or \getting out of the start up. Beyond that everything else is speculation. Once you have consistent product sales you may be able to start forecasting, but only if you can accurately judge your customers needs and business practises.
I agree with what many of the others have said here. A forecast is what you THINK will happen. Additionally, you need to understand how you got to those numbers and what level of effort is necessary in order to make the forecast a reality. This is what we at DE, Inc. refer to as Tuning Your Revenue Engine. There is a video of this concept in our resource section of our MosaicHUB profile.
We advocate using this concept to build your sales plan and then managing to that plan. If you hit your marks along the way your forecast then becomes a reality. If not, then you gain the necesary understanding of your sales process to better forecast and adjust your plan and forecast.
We find most clients can get to where their sales are very predictable in 1 to 3 quarters by using this simple process of Tuning Your Revenue Engine! I hope this is helpful.
Why no but for that you need lot of home work take data of your competitor check there sale ,pin out there week point ,check did they wrk on nich marketing than compare your product with them and than sit use brain you can get forcast
No, surely no, to the degree that angel and venture capitalists know that there is no way you can accurately predict first and second year sales. They just want to see a logical scenario.
To be honest, it's easier for you to get into the routine of listing what your expenses will be and determining what your income will be BUT have an open mind to budgeting and not panic if things go to plan. I have gone from $1 to $1Mn per year and then back to $1 again and it takes alot of mental toughness. Please message me if you need any other help. The one thing i would say is to surround yourself with positive people that can help you focus on growth and not micro thinking.
I was head of finance and IT so heres my 2 pence worth:
1 try and get behind the maths - ie product lines x volumes x price
Give each element some thought - include factors like seasonality, price proms etc
2 build in a contingency - say knock off 10 to 20% - we always sell less and so end more than we'd hope so build this in
good luck :)
Not really. The values are quite random at best but what we do measure is by how much these values are off. Over time, you'll be able to accurately determine what ranges the values start falling under.
Rema, simply forecasts are simply that, forecasts or predictions - with no guarantee that the result will be the same.
Whether you are a small business or a corporate giant, the need for financial forecasts or projections is the same - a roadmap of where you want to land up. But the process and result of getting there depends on many factors that are both in your control and out of your control.
Understanding what those controls is what is important...and planning for, around and in response to them is what is key for a business owner of any size.
- You can control history. If you have any amount of history you can base your projections on, then use them. If there is a business of similar if not exact products and services you can estimate on, use them. If you do not, then even corporate throws darts and hopes they hit a bulls eye...making adjustments as they go.
- You can't control economic or social environment. But can control - research, staying in tune, and adjusting accordingly...but I even warn my clients that often going with the flow of others, will leave you possibly responding on something that you could have done differently and had a different result than the norm, i.e. during 2008-2010, I never allowed my clients to bury their head and cry boohoo, when everyone else 'blamed, excused and reacted' the economy. As a result, they were successful in growing versus retracting.
- Noone knows your products and services better than you. So don't discount that, and use your knowledge to plan accordingly, and always be prepared to review and adjust.
Financials can change the moment you make them, as business plans can and do. The point of them is to have a destination to work toward. Do over think this...use what you know, make a plan, communicate and have everyone working toward that plan, put in regular (weekly) reviews and adjustments, and your forecasts will become the roadmaps they are meant to be; and you can pretty much be sure, they are never exact.
The best way to put together a sales forecast is your knowledge of yur product, your market and the industry. You need as much data as posible in order to choose the variables that will allow you to "calculate" your sales the best possible way. The more date you have the more accurate you are going to be. Sometimes the data is not there and then your experience in the market or knoeledge of the market will have to be enough to build your model.
Sometimes is not necessary to build a huge model, and just a simple equation will suffice for this.
But as soon as you do you budget, you have to keep feeding the actual numbers and changing your model so that you can forecast more accurately your sales.
Both Karen and Jeff hit the nail on the head. The answer is yes, but it requires some thought and understanding of the market and business the start-up is in. Start with thinking about how you plan to get revenue streams. For each revenue stream develop a reasonable flow in the number of units you expect to sell, then apply a price per unit accordingly. If you have different price points for the same product you should have separate line items per price point. You should develop a model (EXCEL spreadsheet) that allows you to easily change the units and pricing assumptions. By changing assumptions you will develop a feel for how the projections would change and what the resulting revenues would look like. It is best to develop a conservative view, a more aggressive view, and an aggressive view of the projections. Base cost plans on the most conservative view to be safe. Going through this exercise will, in itself, force you to understand your revenue flows and what external impacts may have on it. From that you will gain a more comfortable outlook of what you can expect.