This article is part of a series of articles that will explain the key components of the financial and operational planning process for small businesses. This is the second article in the series and will explain the first key element of the financial plan: the sales forecast. Click here to read Part 1 Basics of Budgeting
The sales forecast is your projections, or forecast, of what you think you might sell during a defined period (typically, a year to three years). Your sales forecast is an important part of your business plan, especially when lenders or investors are involved, and should be an ongoing part of your business planning process.
You should create a forecast that is consistent with the sales number you use in your profit and loss statement. In fact, in most business planning models, the sales forecast feeds the profit and loss statement.
There isn’t a one-size-fits-all sales forecast template—every business is unique and will have different needs. How you choose to segment and organize your forecast depends on what kind of business you have and how much sales detail you want to track.
Some helpful questions to consider while building your sales forecast:
- How many customers do you anticipate?
- How much will you charge them?
- How often will you charge them?
Your sales forecast can be as detailed as you want it to be, or you can keep it simple by summarizing. Regardless of the method you decide to do your sales forecast, you definitely need to have one.
Generally, you’ll want to break down your sales forecast into segments that are helpful to you for planning and marketing purposes. If you own a landscaping company, for example, you’d probably want to separate your sales forecasts for lawn care services and design services; if you are a home improvement contractor, it might be helpful to differentiate between full additions, kitchens remodels, bathroom remodels, and additional services like decks and patios. If you want to get really specific, you might even break your forecast down by product, with a separate line for every product you sell.
Along with each segment of forecasted sales, you’ll want to include that segment’s “cost of goods sold” (COGS). The difference between your forecasted revenue and your forecasted COGS is your forecasted gross margin.
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For more on small business financial plans, check out Part 3 for an explanation of the profit and loss statement.