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Forecasting Sales for Start-Ups

Dwight D. Eisenhower said, “Plans are nothing; planning is everything.”  Every business idea must go through the planning stages in order to be successful.  The feasibility of any business idea is not simply dependent on soft sales skill.  Quite often when sales is discussed people focus on the soft skills.  Things like value proposition and handling objections.  However, there is an area of sales that is often overlooked.  Forecasting sales is often a forgotten area for start-ups but none-the-less vital.  Every business from the young tech start-up to an established conglomerate has to forecast sales.  Sales forecasts are required by venture capitalist, bank loan officers, potential co-owners and even from Mom and Dad if they have a stake.  Forecasting is the process of analyzing prior sales in order to arrive at educated estimates about future sales.  The following list details a few tools/ techniques which can be used to forecast sales for start-ups. The sales forecasting process differs slightly when dealing with start-ups vs. established firms.  First let’s discuss a few techniques ideal for start-ups. 


·     Benchmark Industry – One of the easiest ways to begin to create solid forecasts for start-ups with no prior information is to use industry benchmarks.  Look in the same industry for similar start-ups.  What were their sales in the first year?  How are they different?  Is their business the same as your organization?  Use this information as a starting point.  Adjust the information attained to cater to the needs of your particular start-up.  Believe it or not, a lot of information can be found about private companies related to sales. For example, often after a great sales year a company may issue a press release detailing its accomplishment.  It may say something like “Digital Consulting post record year selling over 1.0M computers”.  This information can be translated to total sales dollars if the price per computer is known.   Other resources which can be helpful in the benchmark process are data from trade association and business focused libraries.  A lot of information is available it’s just a matter of knowing where to look.

 

·     Market Size – Another helpful component of the sales forecasting process is the development of market size analysis.  Market sizing is the process of estimating the potential clients which would be interested in a specific product.  This information is than translated into sales.  The market would be all the clients that would be interested in a particular product.  One example is toothpaste, it is purchased by millions of people around the world.  The market size would be all the people that are interested in toothpaste.  Another example, left handed scissors.  The market in this example would be every person who is left handed.  This group is the target audience.  After determining the number of clients a value of the market must be compiled.  In a simplistic example it would be the number clients determined multiplied by the typical sale price.  This would produce a dollar value for the market.  If the average price of toothpaste is $3.00 and we know ten million people are interested in toothpaste and purchase it once a month.  The market size would be $360 million.  Market sizing is a complex process and highly scrutinized by venture capitalist, investors and business owners.  In spite of this, estimates can be made.  This process is both an art and science.  Each start-up is different.

 

·     Source Potential Clients – Another option available to begin charting revenue without prior history is to source potential clients.  This research exercise can be used to forecast sales and market size.  One start-up that I’ve worked with actually went out and did a survey asking the potential market a list of questions.  The last two questions were how much would you pay for a service like this? and may we take your contact information to let you know when this service becomes available?  This is a quick way to gather facts and build a sales lead database.  The next step would be to compile price points identified in the survey.  Summarize the data depicting a range, average and frequency distribution.  Analyze common occurrences and which price point might be best in the consumer’s eyes.  As a caveat make sure that the price point will exceed your costs and produce a comfortable profit.

 

·     Financial Model – To stress the last point, finding the right price point should be driven by profit.  The start-up sales forecasting techniques highlighted have no grounding if not vetted by a financial model.  A financial model essentially maps out the revenue, expenses and profit of an organization.  The price can be right from a benchmarking, market size or potential client perspective but all wrong when we look at costs.  A model will help ensure that the numbers make sense.

 

Sales are the life blood of every business.  Without sales the business is not a business, it’s a hobby.  The techniques highlighted can be helpful to many start-ups with some slight customizations depending on the specific company.

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