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.