The Profit And Loss Forecast - Step 1
Sales Forecast
The first step in the process is the sales forecast. Ideally, you should confer with customers, sales managers, and/or sales representatives to project the next years expected sales. Many owner-managers find the process of securing the input from others to be rather time-consuming, cumbersome, and of little accuracy. Here are two methods to help you predict the next year’s sales:
Method 1:Take the previous year’s sales dollar volume and add to it the current year’s expected price increases and anticipated volume increases. I call this a reasonable guess.
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Example: |
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Previous year’s sales |
1,580,000 |
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Estimated price increases at 7½ % |
118,500 |
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1,698,500 |
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Volume increased at 10 % |
169,850 |
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Expected sales |
1,868,350 |
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Use (rounded) |
1,870,000 |
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Method 2:A more precise method in computing sales dollar volume is to begin with the number of units of product to be sold during the year. Convert units sold to a dollar value. If youcompute sales by product, it will be far more accurate than a reasonable guess.
The biggest problem here is figuring out the number of units to be sold for any product. The best way to do this would be by reviewing history, and then adding or subtracting units depending on your view of the coming twelve months. Include sales people in the process.
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Example: |
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Unit Sales |
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This year |
Total |
Unit** |
Total |
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Product A |
50,000 |
10,000 |
60,000 |
11.50 |
690,000 |
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Product B |
35,000 |
2,000 |
37,000 |
20.00 |
740,000 |
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Product C |
100,000 |
17,000 |
117,000 |
3.75 |
438,750 |
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Expected sales |
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1,868,750 |
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Use (rounded) |
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1,870,000 |
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Method 3:My favorite method is to forecast sales by customer. This is similar to Method 1, except it will be more precise due to developing data in greater detail (by customer). This method works best if you have a small number of customers that make up a substantial percent of the company’s sales. If you are able to do this, it may be the most accurate method of them all.
In practice, review the history of each customer and then add or subtract any changes expected for the coming twelve months. Again, include sales people in the process.
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Example: |
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Sales |
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This year |
Total |
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Total |
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Customer A |
500,000 |
100,000 |
600,000 |
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600,000 |
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Customer B |
350,000 |
20,000 |
370,000 |
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370,000 |
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Customer C |
1,000,000 |
170,000 |
1,170,000 |
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1,170,000 |
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Expected sales |
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2,140,000 |
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Source: Harvey A. Goldstein, CPA , Granville Publications