Getting the numbers right

This article was written by Ed Hatton, the Start Up Coach for the South African edition of Entrepreneur magazine, as the My Mentor column published in June 2013 and is posted here by their kind permission

Entrepreneur optimism in sales forecasting

Entrepreneurs are natural optimists; they have great belief in themselves and their products, they see even ordinary products as being irresistible to potential customers. There is nothing wrong with self-belief; without that we would see few new businesses being launched.

Optimism in sales forecasting is much more serious. There could be disastrous consequences if the venture fails to make unreasonable sales targets.

Before forecasting

Before the entrepreneur even thinks about forecasting the sales volume he or she must define the target markets; groups of people or businesses most likely to become customers. These groups must see a good reason to buy from the new venture rather than their existing suppliers, and be able to learn about the goods and be motivated to buy. The entrepreneur must identify the processes to achieve these requirements. Please do not skip these steps. The belief that ‘everyone will want this product and my website will bring enquiries’ has produced many poorer and embittered ex-entrepreneurs.

Then estimate how many of each category of product can be sold to each target group and at what price – higher price, usually means lower sales, but the reverse is not always true – a lower price does not automatically mean higher sales.

Professional market research is expensive, instead the entrepreneur can do informal studies by surveys, noting the prices of competitive products, talking to customers at locations where similar products are sold or test marketing on a small scale. Get independent opinions from strangers; friends and family may tell you what they think you want to hear.

How many?

Sales volume should be based on intelligence and information rather than guesswork. Take each market group or segment and apply a measure to estimate the sales volume. Use factors like a percentage of shoppers by age group in a mall or the ‘hit rate’ of sales calls, e-mail marketing or internet click-through. Use more than one method to estimate sales and average the results or use the lowest estimate. The forecast should be in the form of a matrix e.g. sales by product group vs. sales channel or customer group.

Once an estimate of the sales volume has been made apply a sensibility check – can you accommodate that number of lunch guests at the available tables? Will your salespeople be able to do enough sales calls? Will your mechanics be able to service that number of cars per day? Do you have enough space to accommodate peak shoppers? Cater for things going wrong – absent staff, electricity blackouts, stock shortages and all the other variables.

Actual vs. forecast

Then cut optimism out of your estimates. Reality is that customers do not like to change and few will even notice that the new businesses exists, let alone absorb its sales messages. Consumers are wary of start-ups especially for a critical products or services. Competitors will not be helpful; their income will be reduced if you succeed. Competition can be extremely hostile, including below cost price wars, advertising onslaught and even spreading vicious rumours about the start up. These activities are not limited to small competitors; some very large businesses have been guilty of serious anti-competitive behaviour. Be conservative in the forecast – it is usually a lot easier to handle higher than anticipated sales than to survive lower than required turnover.

In the excitement of starting operations the forecast may be forgotten once sales start to come in. This is a mistake; the forecast should be a central guide to operations. A detailed sales analysis which records actual against expected sales in the same sales category matrix as the forecast is a vital management tool. If sales do not match the forecast the business needs to revise its financial or marketing planning. Ignorance of how the business is performing, or living in hope that the sales will come in are not good business strategies.

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