Your sales forecast is the backbone of your business plan. People measure a business and its growth by sales, and your sales forecast sets the standard for expenses, profits and growth. The sales forecast is almost always going to be the first set of numbers you’ll track for plan vs. actual use. This is what you do even if you do no other numbers, and it’s probably the first numbers you’ll do.

When it comes to forecasting sales, don’t fall for the trap that says forecasting takes training, mathematics or advanced degrees. Forecasting is mainly educated guessing. So don’t expect to get it perfect; just make it reasonable. There’s no business owner who isn’t qualified to forecast sales–you don’t need a business degree or accountant’s certification. What you need is common sense, research of the factors, and motivation to make an educated guess.

Your sales forecast in a business plan should show sales by month for the next 12 months–at least–and then by year for the following two to five years. Three years, total, is generally enough for most business plans.

If you have more than one line of sales, show each line of sales separately and add them up. If you have more than 10 or so lines of sales, summarize them and consolidate. Remember, this is business planning, not accounting, so it has to be reasonable, but it doesn’t need too much detail. Here’s an example, from a sales forecast for a local computer retail store.

It’s a simple example. You should recognize the arrangement of rows and columns. I’m just showing you a portion of the spreadsheet, because it has to fit on the page.

Notice the predictable structure. First you have units, then prices, then you multiply price times units to get sales. It’s simple math, but breaking it up like that makes things easier later on, when you look at what went wrong (and remember, something will go wrong; business plans are always wrong.)

Even if you’ve never done a spreadsheet, you can do this one. The hard part is remembering that you can estimate, you are qualified, and nobody else can do it better. Just take a deep breath, calm down, and make an estimate.

Or, if you prefer, read on. Let’s talk about working from past data, estimating entirely new products, your data analysis qualifications, and some other factors. Then you can make your forecast.

So you make a sale. When you deliver the goods, you record it as a sale. If the customer didn’t pay you immediately, you record the accrued amount as Accounts Receivable.

You order some goods. When you receive them, you don’t pay for them. Instead, you record the accrued amount as Accounts Payable.

At the end of the tax year you have some expenses outstanding, like professional services you know you’ll be billed for but you haven’t been billed yet. You accrue those expenses into the current tax year. They are deductible against income.

In so-called cash basis accounting, the opposite of accrual accounting, you don’t put the sale or the purchase onto your books until the money changes hands. With business-to-business sales, the norm is the money changes hands later. So accrual accounting is better. It gives your books a more accurate picture of your financial flow and financial position.

Why does this matter here? Because timing of sales, costs, and expenses makes a difference. Start your forecasts correctly so the can be part of a more formal financial forecast when you finally need one.

Just a quick note. I hope it’s obvious. With examples in this book I’m not going to show you the full columns of the spreadsheets, because that’s awkward. Numbers would have to get very small. I use my spreadsheets for sales forecast and other normal monthly projections with a standard layout.

I base this on the standard spreadsheet layout as used in Microsoft Excel, Lotus 1-2-3, Apple Works, Quattro Pro, and even the true pioneer, Visicalc, the first spreadsheet, from 30 years ago. The rows are labeled from 1 to whatever, and the columns are labeled from A to whatever. When you get past the 26 letters of the alphabet you start over again, with AA, AB, AC, etc.

Don’t reinvent wheels. Please. As you do your sales forecast, be aware that accountants and financial analysts have definite meanings for timing of sales. If you don’t deal with this their way, then when you ever do use your work already done on the sales forecast to incorporate into more formal financial projections, you’ll have it wrong. It will look bad.

Nobody wants the analysts, or accountants, or bankers or investors to think you did it wrong. So pay attention to timing of sales, costs, and expenses.

Timing of Sales

Your sales are supposed to be sales when the ownership changes hands (for products) or when the service is performed (for services). It isn’t a sale when it is ordered, or promised, or even when it’s contracted. With proper accrual accounting, it is a sale even if it hasn’t been paid for. With so-called cash-based accounting, by the way, it isn’t a sale until it’s paid for. Accrual is better because it gives you a more accurate picture; unless you’re very small and do all your business, both buying and selling, for cash only.

I know that seems simple but it’s surprising how many people decide to do something different. And the penalty of doing things differently is that then you don’t match the standard, and the bankers, analysts, and investors can’t tell what you meant.

Timing of Costs

Costs of sales or direct costs or costs of goods sold are supposed to be timed to match the sale.

For example, when you buy a book from a bookstore, whatever that book cost the store to purchase was an amount added to inventory until you purchased it, and only then, with the purchase, it becomes an amount added to cost of goods sold. That has to happen at the time of the sale. The bookkeeping takes that amount out of inventory and adds it to cost of sale.

Notice the timing. It sits in inventory for as long as it takes, but it doesn’t get out of inventory and turn into cost of sales until it gets sold.

Messing that up can mess up your financial projections. When sales for the month is $25,000 and cost of goods sold is $10,000, you want the $10,000 to be the cost it took to buy whatever was sold for $25,000. If this month’s costs are for things sold last month, or things sold next month, you get bad information.

It’s harder sometimes with services. The cost of sales for a taxi ride should be the gas, the maintenance, and the driver’s compensation. But accountants would go crazy trying to match the exact gasoline costs to the exact trip, to they estimate a lot. They are always trying to match the months though, costs should go into the same months as the sales.

Timing of Expenses

Expenses are supposed to show up in the month that they happen. Ideally, Travel expenses go into the month you travel, even if you paid the airfare two months earlier. Ideally, advertising expenses go into the month that the ad appears in print, rather than the month you submitted the ad. And definitely, you’re not supposed to wait until the month in which you pay for the ad, which often is two or three months later. You want the timing to match.

“But I have a new product, how can I forecast for that. There’s no history.”

Join the club. Lots of people start new businesses, or new groups or divisions or products or territories within existing businesses, and can’t turn to existing data to use for forecasting the future.

You’re still going to forecast, and don’t worry so much about it, because although you’ll do the whole year monthly, you’re only going to be grossly inaccurate for the first month. By the second month, you’ll have data to use to revise your forecast based on early results.

Think of journalists covering a free election. They don’t want to wait for the formal official results to be published, so they ask people coming out of polling places how they voted. Maybe those people tell the truth, and maybe not, but there’s information to be gathered. They call this exit polls. And if the exit polls surprise people — they thought Jones was going to win by a landslide but the exit polls indicate Smith is winning — then they investigate further. Are these early results coming from just one kind of voter (rich, poor, rural, urban, early voter, whatever) and does that one kind of voter favor Smith more than the rest of the voters? Time to apply common sense.

You do the same thing with your forecast that journalists do with elections. You get what data is available and you apply common sense to it, human judgment, and then you make your educated guesses. As more information becomes available — like the first month’s sales, for example, then you add that into the mix, and revise, or not, depending on how well it matches your expectations.

It’s not a one time forecast that you have to live with as the months go by. It’s all part of the plan-as-you-go process.

Most everybody does. One of the more powerful drags on business planning in general is what I call fear of forecasting. Lots of people have it.

“How could I possibly know?” is one of the more popular complaints. After all, who can predict the future? How can you know what’s going to happen in the market, competition, or new technologies. Isn’t it just wasting your time?

No, it isn’t just wasting your time, because one thing harder to do than forecasting is running a company without a forecast. The real question isn’t how could you possibly know what’s going to happen, but, rather, how could you possibly know whether what actually did happen is good or bad or better than you thought if you don’t know what you thought would happen?

Confusing? Think of it this way: although you forecast for at least a year, you actually only go out on a limb for the next month. In a month, you’re going to review that forecast. You’re going to see what is different from the forecast, and revise the forecast. Your year doesn’t stay static after the first month if results of the first month cast doubt on the whole year.

So don’t worry so much, get started with your forecast, and you’ll be revising.

Remember, there is no single way to forecast any business. It’s often very creative.

Magda was looking at forecasting sales for a small restaurant. She hadn’t locked in the location at that point, but she had a pretty good idea of the small size she wanted. She decided she would be able to seat six tables of four people each as a starting point. She knew of course that things might change when she actually decided on the space to rent; but she had to start somewhere, so six tables of four it was.

Then she did some simple math: six tables of four means at capacity she would be serving 24 meals. Meals take about an hour at lunch, and about two hours at dinner. She figured she’d have one servicing of lunch and two of dinner, roughly calculating the 5-5:30 crowd as the first serving, and the 7:30-8:00 crowd as the second serving. So an absolutely full lunch service in a day would be 24 lunches. An absolutely full dinner service in a day would be 48 dinners.

She decided that an average lunch would be $10 of food and $2 of beverage. And that an average dinner would be $20 food and $4 beverage.

And now I stop for a second, and we consider this. Magda isn’t turning to some magic information source to find out what her sales will be. She isn’t using quadratic equations and she doesn’t need an advanced degree in calculus. She does need to have some sense of the estimated guess. Ideally she’s worked in a restaurant or knows somebody who has, so she gets a sense of reasonableness.

So, end of digression. She can do some numbers. At capacity she sells 24 lunch and 48 dinners in a day, with matching beverages. She can do a simple calculation to figure a good day’s sales:

1. Lunches are 24 times 10 plus 24 times 2, which comes to 240 plus 48, or 288, when she’s at full capacity.
2. Dinners are 48 times 20 plus 48 times 4, which comes to 960 plus 188, or 1148, when she’s at full capacity.

These numbers are not magic. The point of this example is simply that Magda finds ways to make sense of her forecast. As you work with yours, don’t look for some answer out there in the world, like a right answer to a puzzle; look for ways to break your assumptions down into the logic you need to work with them.

Magda should get on a computer and put that in a spreadsheet. Make it four rows labeled lunches, dinners, lunch beverage, and dinner beverage. And then add a row for other, because there is always other. Spread these assumptions out with the simple math so you can see the assumptions.

There’s an example in the illustration here. All the math is simple. If you don’t know how to work a spreadsheet, using formulas for rows and columns, go to spreadsheet logic for some resources. Don’t get fear of math, or fear of finance. The math is simple.

Having figured out what sales might be in a maximum day, then she looks at how sales might vary for the days of the week. The provides a weekly base line. It isn’t just four weeks per month; multiply an average week times 52, then divide that product by 12 to get an average month. In the example, you can see how Magda estimated conservatively, with less for example on Sunday lunch, and closing at lunch on Saturday and Sunday. She knows she’s not going to get a full capacity day that often. So she’s calculated a base line month as show, with around 350 lunches and 1044 dinners. But she’s also just starting up, so she comes up with an educated guess for a lot lower than that, around half the capacity.

By the way, she can do that kind of a forecast graphically, with the right tools. Draw the line to help yourself visualize the way the numbers flow. Here’s an example of how a simple line drawing can forecast the lunch number for the first year.

Remember, please,these are not scientific numbers. They are based on assumptions. What’s going to happen with the plan-as-you-go business plan is that you’ll review these numbers every month, and tune them against reality. So therefore you don’t have to guess right for long stretches into the future; you have to start with a reasonable guess and then start tracking.

Furthermore, you don’t have to be right from the beginning because as your business goes on, you constantly improve your forecast. After the first month, as you look at the second months and all the rest of the forecast, you have the results from the first month to work with. Always review, and revise as the review indicates.

So with Magda and her restaurant, she starts the forecast and the first month results come in. Oh-oh, lunch sales are much less than she thought, but then dinner sales are slightly more.

So here’s the difference between what was planned and what happened:

And from there, Magda revises her sales forecast. Why wait? She had a logical first guess based on some simple numbers, but then she already has real-world results. So revise. Here’s a revision:

And now her sales forecast is up and running. Plan as you go.

Although we probably agree that the best way to forecast sales is by looking at past experience, I know that you can’t always count on having that kind of information available to you. So let’s suggest other examples. It’s never as exact as it sounds. There’s a lot of creative guessing. Here are just a few examples. These are ways you might forecast sales of a new business. The point isn’t listing acceptable methods, but rather to suggest that anything logical might work. So here we go:

• You want to sell products over your website? Ok find a way to predict traffic. Maybe you can buy search terms. For example, with Google advertising, Google Ad Words can help you estimate how many will see the link you buy on the search terms. Then you estimate how many of those people actually click your link. Estimate a very low percentage, less than 1%, unless you have the world’s most compelling link. Then estimate how many of those actually buy what you’re selling. That’s a low percentage too. At least with this you’ve got some mathematical basis for unit sales. And if you’re estimating more than 1 per thousand, be careful, it’s probably too high.
• Doing retail business? Find some estimates of sales per square foot for your type of business. You can do a web search for that, and you might find something. I found annual sales per square for for Best Buy, Apple, Neiman Marcus, and Tiffany, and learned that Apple does $4,000 per square foot, compared to $2,600 for Tiffany and less than $1,000 for those other two.
• Let’s say you’ve published a book you wrote, in a self-publishing mode, you paid to have the book printed. Forecast your sales through different channels: amazon.com and competing websites first, then perhaps through distributors to physical bookstores. But can you get that book into distribution? Will they accept you? Use the reverse tree method and call other authors from the same publishing house to see how they did. Do a web search on self publishing. Start a blog and use search terms advertising to generate readers. Estimate how many people who visit your blog will click a link on it to buy your book. Build your sales forecast according to the places where people can buy the book: online at your site, online at other sites, and physically in stores. Be realistic about how long it takes to get into stores.
• You are opening up a bicycle store in a summer tourist destination. Find an estimate of tourists, then estimate what percent end up renting a bike, then how many units that means, and go from there. Or count bike rentals per day, and build up a forecast from there.
• Selling products through channels of distribution? Maybe unit sales by channels.
• Professional consulting? Do it by the job, or the day, or by the hour. Make assumptions based on leads.
• Lots of companies use pipeline analysis: how many leads per marketing effort, how many presentations per lead, how many closes per presentation.

Whatever it is, find some numbers and logic for it. Break your assumptions down into units, and price per unit, and have some way you can check on the logic and revise and track as the numbers flow in. The key to this is watching the actual results.

Business charts are an excellent tool for understanding and estimating numbers. Use them to evaluate the projected numbers. When you view your forecast on a business chart, does it look real? Does it make sense? It turns out that most humans sense the relative size of shapes better than they sense numbers, so we see a sales forecast differently when it shows up in a chart. Use the power of the computer to help you visualize your numbers.

For example, consider the monthly sales chart below. You can look at this chart and immediately see the ebbs and flows of sales during the year. Sales go up from January into April, then down from Spring into Summer, then up again beginning in September. When you look at a chart like that, you should ask yourself whether that pattern is correct. Is that the way your sales go?

Monthly Sales Chart

The next chart shows a comparison of three years of annual sales. Here again you can sense the relative size of the numbers in the chart. If you knew the company involved, you’d be able to evaluate and discuss this sales forecast just by looking at the chart. Of course you’d probably want to know more detail about the assumptions behind the forecast, but you’d have a very good initial sense of the numbers.

Annual Sales Chart

When we did the sample restaurant sales forecast, we used a line chart to estimate the seasonality for the restaurant.

Yes, that’s right. If you can, whenever you can, start this year’s forecast by putting last year’s numbers onto this year’s spreadsheet. Then revise as needed. One of the real luxuries of the existing and ongoing company, compared to the startup, is that there is data. You have experience.

As soon as you have a forecast with last year’s numbers in it, then you starting thinking about what’s going to be different.

• What’s new and different this year compared to last year? New products? New business relationships, new channels, new locations maybe?
• What about bad news. Sometimes things are cooling, some new problems develop. Maybe new competition shows up.
• Will pricing change?

You can look at costs and expenses too. Normally we assume costs and expenses rising gradually. That’s just a general matter of inflation. Is it going to apply for your business in the next year?

Why? Or why not?