How to Develop 3 to 5 Year Sales Forecasts
Developing a 3 to 5 year sales forecast is difficult enough when you factor how customer needs, cyclical fluctuations, and seasonal variations could dramatically change during that time span. A business must look at several critical metrics in order to see into the future, understanding that the forecast itself must evolve and change throughout the same time period. Follow this formula and you will create a more accurate sales forecast by which to make your business decisions.
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Instructions
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Steps to Create a Sales Forecast
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Collect all relevant data. Look at your business model and examine the factors that could impact future sales and profits. What are the latest trends for your industry, geographical market, and competitive developments? Will you be launching any new products, for what current niche or expansion? What are your market conditions, seasonal considerations, positioning of your current business structure and honest evaluation of your present business competencies verses what will be needed in the next 3 to 5 years? What are the after sales costs of defective products, returns and refunds that could affect your future bottom line? Author David Brock points out the importance of these considerations. "After sales issues are very expensive unless carefully controlled . . .The frightening reality is that many if not most companies do not actually know the scale of these costs and their impact." The goal of gathering this data is to calculate accurate, realistic numbers that are feasible and achievable.
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Determine the measurements by which you will evaluate the data to create your forecast. Options include calculating the average sales per square foot for yours and similar stores for your area and industry. Take that monthly gross sales figure and multiply by 30. Another is to look at the geographical market and estimate how many households will need your products and services. How much do they currently spend on the same items annually and what percentage of those purchases will be with you? Typically, retail purchases are made within a 1 to 5 mile radius of your location while major purchases can extend up to a 30 to 50 mile radius.
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Create three cash flow projections to demonstrate three possible scenarios of the future; pessimistic, realistic and optimistic. Your pessimistic forecast would be "worse case" where your sales and costs are low and you make no profit or operate at a loss. Your realistic forecast would be as honest as possible when looking at the factors of your data, business position, market conditions and whether you will achieve your goals. The optimistic forecast would be realized when the data results in better than anticipated outcomes from possible industry, social and economic improvements. All three cash flow projections are helpful when making important decisions about your business's future.
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Change your forecast as your real time sales and expense figures come in month-to-month. If one of your suppliers suddenly goes bankrupt and you have to find another source of raw materials or goods, your costs, production and delivery time may all be affected. Your forecast will need to be updated to reflect these changes and their future impact. On a brighter side, if a new industry opens in your community, bringing new jobs and optimism to the area, your forecast would need to be updated in order to predict additional sales and services needed to fulfill the new numbers.
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Tips & Warnings
Do research with your local chamber of commerce and state wide chamber of commerce. They have many of the figures and data you will use.
Review your forecast every 3 months to update and maintain its accuracy
Unrealistic numbers and data may look good on an initial report, but will haunt you when they don't come true. Be real from the start, and you will have justification for your numbers whatever the future may bring.
References
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Comments
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Thanks.....will do.
