A sales forecast is an important management tool in small business that all business owners should do, regardless of the size of their business and their future intentions with the business. Some owners are satisfied letting their business tick along, as it always has done, and have no plans to develop or grow the business. Whilst this approach may be suitable in the short term the long term survival of the business may be jeopardized. It is almost guaranteed that costs will increase, and if the sales remain static the profitability of the business will decrease as the costs increase which is likely to lead to failure.
A well thought out and documented sales forecast provides many benefits to the business, some of which are likely to include;
i) A sales forecast will provide a sense of direction
Since the sales forecast is an intention, or a plan it clearly identifies a goal for the business to achieve, which will give the owners, as well as the staff, something to aim for and a target to reach. Some businesses simply run along as they always have done with no real sense of purpose, which may lead to them becoming stagnant. With a sales plan in place hopefully this should not happen.
ii) A sales forecast will help to motivate
A clear goal provides something to aim for, which should help to stimulate not only the business owner but also the employees. A well thought out and documented plan will serve as a motivator, and to increase the effectiveness incentives should be given, either in the form of bonuses, coupons, gifts etc. as specific parts of the overall plan are achieved. However, the sales forecast should be realistic and achievable otherwise it may have the opposite effect and de-motivate staff if they feel they have no chance of meeting the plan.
iii) A sales forecast can be used in bank funding applications
When a business approaches the bank for a loan the bank will want comfort the business can repay not only the principal amount, i.e. the capital, but also the servicing costs, i.e. all interest and associated charges and arrangement fees. The sales forecast will help to support application by providing some evidence to the bank that there will be cash available to repay the loan. When providing a sales forecast to the bank it is important to ensure it is realistic and the figures are based on historical information and reasonable assumptions. Whilst evaluating the sales forecast the bank is likely to pull the figures apart.
iv) A sales forecast can be used in obtaining funds from private investors
As an alternative to a bank loan a business may be able to get cash through external investors. Where a bank will want to know the business can repay the loan the investor will want comfort that the business will grow and develop and be capable of buying the investor out at some future point. Whilst the business is growing the investor is going to want some return for the investment, effectively ‘interest’, and the sales forecast should help to provide this comfort. When evaluating a sales forecast the investor is likely to pull the figures apart, just like the bank will, so it is important to prepare the forecast on historical information and the likely impact of future plans.
v) A sales forecast can serve as a disposal document
A sales forecast is a useful document used when actually selling the business. Most potential acquirers are going to want to know the business is a sound investment that will generate a return in the future, after all what’s the point of buying a business if you don’t get anything out of it? The sales forecast is used to show potential acquirers the business will make future sales after disposal, i.e. during the acquirer’s ownership of the business. In some situations, the selling price of the business is based on the future performance of the business and what it is capable of achieving, as opposed to what it has achieved in the past.