Initially, these calculations will be used when you are assessing the viability of your new online home business. But you will also be able to use them to develop your financial plan during the business planning process.
Your estimated sales volume and dollars will be included in your cash-flow forecasts and your pro-form Income Statement.
You will also use these calculations every time you go through the process of setting your operational budget - which should be a process you go through at least once a year! Therefore it important that you spend a bit of time getting your 'educated
guess' as accurate as you can.
Three Components for Calculating Your Sales Forecast
There are three components in calculating your sales forecast, setting your prices, estimating the sales volume, and estimating the likely growth in sales over time.
Setting Your Sales Price(s)
The next step in calculating your sales forecast is to determine the price.
How much are you going to sell your product or service for?
There are two main methods used to determining the price of your products or
services, the first is a cost plus method where a percentage is added to the
cost to cover your fixed expenses and to meet profit requirements and the other
is market pricing. Regardless of which method you decide to use, it is always a
good idea to have a thorough understanding the cost structure for each of your
products before you make any pricing decisions!
Believe me, there are more than enough people out there who would like
nothing more than to cut your throat (in business, not literally) without you
saving them the bother and doing it yourself by making pricing and other
business decisions without first putting in the effort to get all your facts
For more information on how to calculate your product costs go on to the next
step for a discussion of how to classify and calculate your costs, but don't
forget to come back later and finish calculating your sales forecast!
Estimating Sales Volume
To calculate your sales estimate you will need to have a clear idea of what
it is you are actually selling whether it is a physical product or a service,
some idea of who you will be selling it to, how you will be selling it, how much
you will be selling it for and how often you will be able to sell it.
Much of the information you need to develop your sales volume estimate will
be readily available to you if you have already done your market research.
You will know what your potential customers are looking for and their
preferred mode of delivery. You will have identified whether or not those
customers are price or time sensitive and you should have a reasonable idea of
the prices your major competitors are offering. If your potential customers are
price sensitive, the information you have gathered on your competitors will help
you to establish a realistic 'price range' for your business.
You will also know the approximate size of the market you are targeting and
have a reasonable idea of how much of that market you might be able to capture.
All of this information will help you to determine what your sales volume is
likely to be in the first year or so of operation. If you haven't done your
market research, I suggest you return to the page on small business market research and get started!
You also need to have a good idea about the sales volume that you need to have to cover your costs and generate a reasonable amount of profit. The way to determine that is to do the exercises outlined on the profit planning page to identify your operating costs and using the prices generated in the step above to work out your break-even point.
Once you have that information you can begin to play with the numbers and work out the level of activity you need to achieve to generate enough profit to make the investment in the business worthwhile.
Ideally the potential sales volume indicated by the research you have completed about your industry and the customer base you are attempting to capture will be similar (or better, better is good) than the calculations you have just done.
Working Out the Timing of your Sales
The timing of your estimates growth in sales is more important than most
first time business owners realise. Many estimate the total sales for their
first year of operation and divide it by twelve to calculate monthly sales (and
cashflows). However with a new business venture it is more likely that your
sales will start out low and gradually increase as time passes.
What I recommend is that you work out what ongoing monthly sales figure you
are targeting and estimate how long the business will need to operate before
that sales figure is achievable. Then work backwards.
Let's say when your business is running smoothly you expect to sell 1,000
units of product per month. In your first month you might expect to sell 50,
then 100 in the second month. Then in your third month you predict you will sell
100 to new customers and another 100 to existing customers for a total of 200.
Your estimated sales for the three months would be 50, 100, and 200. It might
take you another three months to reach you target monthly sales or it might take
you the rest of the year.
And that is where the best guess based on all the information you have
gathered about the market and your target customers comes in. Just keep it real.
No potential investor is going to believe that you will be able to go from zero
sales to meeting your sales target in a matter of days, it is probably going to
take months if not years. Don't blow your credibility by overestimating your
likely sale performance when you are calculating your sales
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