In the context of business planning, it would be fair to say that producing financial projections is the most teeth-clenching, hair –tearing, sweat-inducing, sanity-defying task of them all. This is particularly true with regard to sales or revenue calculations. The business is judged by its sales, and your sales projections set the standard for profits and growth. I have been asked countless times ‘how do I predict the sales, how am I supposed to know what revenue I am going to make’? There is a fine distinction, but a very important one, between predicting sales and projecting sales. The first one allures to pure guesswork, of the gazing into a crystal ball variety. The second one, however, involves a much more scientific approach. Same difference, I hear you say – what does this mean in practical terms?
Well, the methodology involved in achieving sound sales projections usually involves some or all of the following elements:
Defining Operational Limitations
Simply put, if the business possesses only one piece of equipment capable of producing a maximum of 500 units in a week – that will define your maximum amount of weekly sales, no matter what. Similarly, you will have limitations in manpower – for example if you are a sole trader providing a service, you will only be able to put a fixed number of hours into the business, even if you assume that orders are flooding in continuously. Define all your limitations. They may involve working space size, stock turnover, transport capability or warehousing capacity. This will help you define your assumptions on which your financial projections, and in particular sales, will be based.
Defining the Market Limitations
If your target market is, for example, men in Ireland between ages of 18-24, then the maximum possible number of sales to this target group is your limitation, which has to be worked into your financial projections. Similarly, the geographical spread might be another limitation. If you are working on a local basis and your reach is a 30 mile radius, working out the maximum sales output within this area will help you define a realistic sales target, which again will help shape your financial projections. Also, undertake a thorough research of the competition. How are they doing? You can benchmark your projections against sales that are achieved by more mature players in the market, another important indication of whether your financial projections make sense in the real world.
Where does the growth come from?
Financial projections usually span over 3-5 years. Where does the growth come from? Again, if you are showing an increase in sales over time, make sure this involves sound principles. This may involve for example:
- Introduction of a marketing campaign, resulting in higher sales
- Introduction of an additional sales person, resulting in higher sales
- Selling to new market segments or new markets
- Introduction of additional product lines
- Introduction of additional sales channels (e.g. online/offline)
- Introduction of additional features (added value)
- Introduction of bundled packages (added value)
- Price increase based on e.g. greater brand recognition
- Introduction of special lines (limited edition)
Be mindful of seasonality. If you have, for example, a tourist orientated business the bulk of the sales would be generated in the summer. Make sure your projections reflect any market trends that are specific to your product or service, include any rise and fall in demand that can be reasonably foreseen. Be mindful of technological advances and consider how they may impact and influence sales of your product or service, and ultimately – can introduction of new technologies increase your sales by increasing their appeal/adding value.
What if I have an online business?
In many ways, an online shop is very much like a physical shop. You need to be able to project how many people are likely to visit your shop, and out of those visitors, how many are likely to end up making a purchase. A good place to start is to utilise one of the many free web analytics tools ( http://www.inc.com/guides/12/2010/11-best-web-analytics-tools.html )available. Have a look at similar websites to yours and work with the numbers you extract from your research – such as the number of Unique Visitors and the bounce rate. You can use this research to work out your assumptions and limitations.
In summary, the answer to what makes a good realistic sales projections lies within the specifics of your business. Work out your limitations and what is realistic within your target market and the necessary ‘how to’ structure for your calculations will become apparent.