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Forecasting for small business
Starting a small business is hard. It has many challenges. One of which is figuring out how much you are going to sell and how much you need to create. Forecasting is a strategy that helps you predict what you are going to need.
In business there are a few ways in which forecasting is important.
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1) Sales forecasting. 2) Pro Forma.
Sales Forecasting
Sales forecasting is the process of gathering, organizing and analyzing information in such a way to predict what your sales will be. Some sources of information to help you gather forecasting details can be found through competitors, neighboring businesses, trade publications, trade directories, trade associations, trade suppliers, and downtown business associations. Below are the steps for developing your forecast for a brand new startup company.
First, determine the trends of your industry and develop a customer profile.
A sample profile might look like this:
- Male, ages 20-34, professional, middle income, fitness conscious.
- Young families, parents 25 to 39, middle income, home owners
- Small to medium sized magazine and book publishers with sales from $500,000 to $2,000,000
Find out what the current trends are in your industry. Talk to people, check trade periodicals.Find out what's selling and what's not.
Second, determine the size and characteristics of your sales area. Use local sources and any available statistics to help in this endeavor.
You need to know if your customers exist within your sales area. How far are they willing to travel to get the items they need? Where are you going to promote and distribute your goods? Census information can help you with some of the statistical characteristics you may need, like number of households in that region.Neighborhood business owners, the local Chamber of Commerce, the Government Agent and the community newspaper are some sources that can give you insight into unique characteristics of your area.
Third, determine who and where your competitors are in within your sales area.Study your competitors. Get out on the street. Visit their stores and locations where products are offered. Analyze the location, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If feasible, talk to customers and sales staff.
Fourth, Use your research to help estimate sales on a monthly basis for the first year.
The basis for your sales forecast can be based upon the monthly sales of a like sized business in a similar market.It is recommended that you make adjustments for the year's predicted trend for the industry. Be sure to reduce your figures for a start-up year by a factor of about 50% a month. Consider how well your competition satisfies the needs of potential customers in your trading area. Determine how you fit in to this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, and better service? Consider population and economic growth in your trading area.
Using your research, make an educated guess at your market share. If possible, express this as the number of customers you can hope to attract. You may want to keep it conservative and reduce your figure by approximately 15%. Prepare sales estimates month by month. Be sure to assess how seasonal your business is and consider your start up months.
Pro Forma Forecasting
While everyone hopes for the best, reasonable projections are much more important in managing a business. That's the idea behind a pro forma. A pro forma is an analysis that projects the future impact of a loan. It helps determine how much additional business you need in order to repay the loan. By projecting the impact of a business decision on future profits, a pro forma is perhaps the best measure of the ratio of return versus risk. This is just as important for you to know as it is for us.
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