How Creating Sales Projections Can Help Your Small Business

Author: Rieva Lesonsky | October 20, 2016

Do you regularly create sales projections for your business? If not, you’re missing out on one of the most useful growth tools at your disposal. Projecting future sales over a specific time period enables you to plan better for all elements of your business, from ordering inventory and budgeting for marketing expenses to hiring new employees and obtaining necessary financing.

Sales forecasts are based on a combination of factors, including data about your prior sales, your assessment of industry and market trends, the economic climate, your competition, and estimates from your salespeople.

Start Your Sales Projections with Hard Data

Use the sales reports in your accounting software to spot trends in your sales. The longer your data goes back, the better and more accurate your sales forecasts will be because it will be easier to tell whether fluctuations in sales are recurring trends or not. For example, if you own a retail store, you may see that your sales are highest in the last quarter of the year (during the holiday shopping season) and lowest in the summer. That’s probably an annual trend.

Try to determine what causes the sales trends you see and whether you can expect them to continue. Was a surge in sales last year due to an especially good salesperson who has since left the company? If so, that may be a fluke. Was it due to the introduction of a new product or service that continues to experience growing demand? If so, sales will probably keep growing.

Next, Look at the Landscape Around You

  1. Industry trends

    Is your industry becoming less or more competitive? Is it going through a shakeout? Is it in a growth phase, holding steady or dwindling? All of these factors will help you forecast whether your sales are likely to grow.

  2. Market trends

    What’s going on with your target market? Get some insight from demographic market research. For example, if you sell baby products and the birth rate is projected to rise for the next 10 years, your market is growing, which should increase sales. If your market is shrinking or in transition, however, you might have to plan for sales to hold steady or even decline unless you make some changes.

  3. Economic climate

    The overall economic climate is a factor in every business. From gas prices to the housing market, assess economic issues that may affect your target customers’ purchasing habits. You also need to pay attention to global economic issues, even if you don’t sell overseas, because the global economy affects factors such as the cost of utilities, raw materials, inventory, and shipping.

  4. The competition

    How are your competitors doing? Are they expanding, adding new products, or targeting new markets? This could indicate either a growing market with more room for you to succeed, or tougher competition that could squeeze your sales. Have new competitors entered the market, and if so, what are their prospects for success? Industry associations may have data that can help you see how well your competition is doing in general.

Now, Look Internally

Create some rough projections and, if you have salespeople and staff, get their input into whether the projections are realistic or not. Make sure you are clear on all the metrics of your sales process, such as how many prospects you need to convert to reach your projected sales. Then figure out what type of marketing budget will be needed to attract that many prospects and what type of sales support will be needed to convert them. Do you have enough cash flow to finance adequate marketing and sales, or will you need working capital to do so? Do you have enough salespeople to move leads through the pipeline, or will you need to hire?

Most business owners do sales projections for one year out, but depending on your needs, you may want to go out three years or even five. Once you have your sales projections, subtract expense projections to arrive at the projected cash flow and profitability for your business during the chosen timeframe.

Of course, like every type of projection, sales projections are not set in stone. Don’t put them aside and ignore them: Review them every month and compare them to actual sales. This way, you can fine-tune your projections as you go and troubleshoot quickly. If your sales are consistently lower than your projections, dig in to identify what’s keeping you from making the sales you’ve expected. If your sales are consistently higher than projections, this isn’t necessarily good news. A business growing faster than expected may face a cash flow or staffing shortfall. By reviewing your sales projections regularly, you’ll be able to nip problems in the bud and obtain the financing you need to achieve your sales goals.

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