Sales forecasting for startups: what you need to know

This article explores what a start-up owner needs to know to build an accurate sales forecast and use it to guide business decisions.

• Sales forecasting means predicting your sales, costs and profit over a set period, and it’s an evolving document that needs regular tracking and updating rather than a one-off exercise.
• New businesses without historic data can use a soft launch, or test market analysis forecast, to build early sales data before committing further.
• Build your forecast by listing your products or services, estimating sales volumes, then multiplying by price and subtracting your costs to reach your profit, ideally with best, worst and most likely scenarios.
• Keep reviewing external factors such as sales trends, competitors, the economy and legislation, alongside internal factors like your goals and sales process, since both affect the accuracy of your forecast.

Read on for the full breakdown.

By Leon Howe

Leon Howe, Durham City Incubator Manager at Business Durham, helping startups succeed and scale.

All posts by Leon

Sales forecasting is essential for managing your stock, workforce and cash flow, making important business decisions, and growing your business.

But you don’t need a maths degree or accounting software to master it. You just need to know your business and your market well enough to make your predictions accurate.

What is sales forecasting?

Sales forecasting, at its simplest, means predicting the sales your business is likely to make over a set period, the costs it will incur in doing so, and the profit left over at the end. It’s an evolving document that needs constant tracking and updating to stay accurate.

You can forecast monthly, quarterly, twice a year or annually, but the shorter the period, the more accurate your updates will be, rather than a data dump covering a longer stretch of time.

Forecasting without historic data

As a new business, you won’t have historic data to establish a baseline. This makes it even more important to consider every aspect of your business finances and adapt your forecast regularly.

You could also try a soft launch of your product or service, sometimes called a test market analysis forecast. This lets you build data from releasing a small number of products, so you can analyse what future sales might look like.

As a start-up, a sales forecast helps you work out how many sales you need to break even and start making a profit, and whether you need investment to get your business off the ground. Without it, you won’t be able to make informed decisions, even on the simplest business moves.

How to create your sales forecast

To create your sales forecast, you need to:

1. Make a comprehensive list of the goods or services your business sells, splitting these into categories if needed
2. Estimate how many of each you’re likely to sell, usually by month or quarter, over a year, based on your knowledge and your sales and marketing activity
3. Multiply the selling price of each product or service by your sales estimate for that month or quarter
4. Identify the unit cost of making or delivering each product or service
5. Subtract your total costs from your total sales to establish your profit

Build in best and worst case scenarios

It’s worth putting together multiple forecasts: your best estimate, along with optimistic and pessimistic versions. Your estimates may rest on variable assumptions, and having best and worst case scenarios makes your business planning more accurate.

It also shows investors or incubator programmes, such as our own, that you understand what it takes to get your business making money and how your sales may fluctuate.

This aspect of business planning is covered in much more depth in Stage 3 of the Durham Startups Roadmap, so it’s worth taking a look if you’d like a fuller walkthrough alongside practical templates.

Important things to consider

Sales forecasting supports business growth. A forecast showing a significant rise in sales might prompt you to grow your team or look for larger premises in preparation. Shortfalls, on the other hand, give you time to adapt and turn negative numbers around before they happen.

There’s plenty to weigh up, both inside and outside your business, that can affect your predictions.

External factors

Your forecast should account for sales trends, competitors, the wider economy, and how your customers’ needs are changing. Stay on top of these areas and your results will be far more accurate.

Changes in legislation matter too. They’re less frequent, but you must act on them to stay compliant in your industry.

Internal factors

Internally, you need to understand your own processes. This includes your individual and business goals, along with the complexity of your sales process, and how these affect income, whether for existing products, evolving ones or new launches.

You also need to understand your costs and how changes to any of the above might affect your forecast, including what you invest in marketing to launch a product or attract more customers.

Sales forecasting comes down to using all the variables around your business to predict the future of your sales, and it quickly becomes second nature to new entrepreneurs.

For more practical advice about building an accurate sales forecast for your start-up, call us on 03000 261261 to speak with one of our startup solutions advisors and find out how we can help your business grow in County Durham.