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A new year is just around the bend, and that means it's time to start planning for the future. For small businesses, this often involves last-minute tax preparation items and projecting revenue streams for the upcoming year to best prepare for what lies in store. This kind of planning not only demonstrates good financial practices but also keeps your business aligned when it comes to transparency and trust in your organization.
If the idea of running full-scale financial forecasts is a little overwhelming, you're not alone. Generating a forecast can be a blend of art, science and guesswork, forcing business owners to rely on past trends to predict future performance. And it's important, too – poor forecasting can sabotage even the best business plan, compromising an otherwise promising company. Here's what you need to know if you're looking to forecast sales for the new year.
Create a sales breakout
To start outlining the most realistic estimate possible, break down your goods and/or services. Determine what your base will be. Some options to consider:
- Revenue accounts
- Service categories
- Individual services
- Product types
- Product units
If you sell multiple items or services, lean into categorizing them; this will cut down on the time it takes to forecast your sales. Whatever you choose as your financial base, make sure it aligns with your accounting structure when tracking your actual sales against your forecasts.
Determine a starting point
Let's say you made $100,000 in sales in the past year. Provided all elements of your business remain the same, you can use this as a starting point. To have a more accurate starting point, take into account inflation predictions for the coming year. Identify KPIs that will help monitor progress toward sales goals. KPIs like conversion rate, customer retention, and average order value provide insight into what’s driving sales and where to adjust.
Most businesses do not see flat revenues from month to month, so from this point, you'll need to incorporate seasonal trends to determine a quarterly, monthly, or weekly breakdown. If you tend to see a spike around the holiday season, weigh your sales more toward November and December. If your primary products are summer-related, consider adjusting your forecasts to favor June, July and August.
Once you have established a distribution, your periodic sales projections can be allocated accordingly.
Adjust based on anticipated changes
Few businesses stick to the status quo year after year with no strategies for growth and change. These strategies could be a fresh marketing campaign, phasing out a specific product, or focusing on a new product line. Whatever the case, if you have any plans to grow your operations in the new year, factor these into your forecasts. Especially in fluctuating markets, create scenarios with different sales forecasts (e.g., optimistic, pessimistic, and realistic). This helps you plan for uncertainties and respond to changes more effectively.
Be sure to pay attention to trends. Look at industry reports and economic forecasts to understand broader market trends that may impact sales. Consider shifts in consumer behavior, emerging technologies, or regulatory changes that could influence demand. If you had a slump in a previous best-seller last year, it might have been a one-off. However, if you've seen several years of decline, factor that trend into your estimates.
Incorporate outstanding items
No two years are the same. If you have any indication of extraordinary events on the horizon, incorporate them into your annual forecasts. Some examples:
- Expiring sales contracts
- Near-finalized sales contracts
- Analyst projections for your industry
- Overall projected changes to the economy
- New adjustments to taxes and tariffs or potential challenges with trade
Consider expenses
While revenue matters, it's not the only factor that makes a difference. It's possible for a company to make plenty of revenue and still end each year in the red.
Your expenses throughout the year will help you better project profits. First, start with your fixed expenses, or the things that are relatively flat, like rent, electricity, water, and property taxes. Then, consider your variable costs and/or irregular costs – some of these could be places to cut costs should expenses exceed sales. Any increased inventory or product costs should be included as well.
Taking all these elements into consideration will allow you to create your weekly, monthly or yearly sales forecasts. As with the other financial statements mentioned, there are several online templates available to make your sales forecasting process easier.
Remember: There's no perfect way to project sales, but including as much information as possible, building off a solid financial base, and staying up to date on upcoming changes can help you prepare.
For more information
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BBB Great West + Pacific contributed to this article.