Ultimate start-up guide – Forecasting

So the time has come to try and figure out what kind of sales your new business idea might be capable of bringing in and what it might cost you to operate.  This, in a nutshell, is called forecasting.

Forecasting is not a one-time job; it is something you will continue to do as part of your businesses commercial process.

Estimating costs can mean you will understand, not only how much capital you need to start your business but also the ongoing costs and how profitable you can be once the sales start coming in. Estimating your sales during the planning process can be trickier. In fact, we see a few methods. It might be worth having a go at all of them in order to land on a number that you feel comfortable and somewhat confident in.

Top-down

This method of forecasting relies on the research you have done into your target market. You will need to estimate of your total target market, how many customers you think you can realistically ‘win’ (or convert) in the first 3, 6 and 12 months — all the way up to 3 years.  You need to factor in things like repeat purchase, ongoing sales/subscriptions etc. depending on your business. Consider your marketing and how many of your target audience you think you will gain awareness amongst.

Bottom-up

This forecasting method is essentially determining a sales target and working back from there. Often this sales target will be the minimum sales you need in order to sustain your business. If you have established your budget and understand the costs of operating your business, then you can establish what you need to sell to stay afloat. This is a useful cost control and breakeven exercise, but it’s advisable to do this alongside the other methods so that you ensure you can make a profit and don’t sell yourself short.

Phone a friend

It is good practice to understand other businesses that are similar to yours so that you can gain insight into things like what marketing has worked for them, when sales started to pick up (you might hear it called the ramp up or growth phase), seasonality, costs, pricing strategies etc.

By picking the brains of someone who’s business has some similarity to yours, you could add an additional layer of logic to your numbers.

Phone an expert

If you really want to stress-test your numbers, or if you don’t know where to start with forecasting and the ideas above seem daunting then call an expert. Accountants spend a good deal of time reviewing forecasts, budgets and business ideas and so will be able to give you a much better steer. In fact, at Barnett Ravenscroft, there is nothing we love more than meeting new ambitious entrepreneurs to see how we can bring their ideas to fruition. Get in touch today if this is you, we’d love to chat.