It might not sound exciting, but if you can’t forecast your sales, you can’t expect real growth in your business.
Here’s the reality of most (if not all) businesses. First, few companies are pure cash businesses, which means you’ll more than likely have terms of payment sitting on both sides of your business model.
Customers demand payment terms and you want their business, so you oblige. On the supply side of your business model, you’ll order from a trustworthy company whose pricing is good and whose payment terms are reasonable, but more often than not you’ll need to settle these accounts before your own invoices have been settled.
“If you don’t have a firm grip on your sales, inventory and projected sales, your turnover, even if it’s healthy, won’t translate into the profit margins you expect, leading to a cash crunch,” says Pavlo Phitidis, founder of Aurik Business Accelerator, which supports SME growth.
“Take a careful look at your business. What do your materials inventory, work-in-progress and especially finished stock ratios look like? Have you analysed them? Are you sure you aren’t carrying unsaleable stock, which is tying up much needed cash flow, and hurting your margins?”
Forecasting the future
If your business relies on inventory in any way, it’s imperative to develop a system that creates an inventory order foresight capability. It’s called a sales forecast.
“Your forecast should specify sales into product units, so that you can get a sense of what the future plan of the business will look like. You can then support the forecasted sales with a promotional plan,” advises Phitidis.
“When creating a forecast, it’s vital to read the market signs and present them in product units, so develop an inventory ordering capability that takes into account the manufacturing process and delivery process from your suppliers.
"This should allow you to move to a point with your clients where you could pre-sell season-specific products before even placing orders with your suppliers, which is especially useful if you’re dealing with oversees manufacturers who have different seasons to our own.”
Forewarned is forearmed
As trite and simple as it may sound, the power of doing a well thought-out sales forecast in your business provides you with advantages that you would never have thought of. Most of us don’t do it, especially in fast growing businesses where our management capability and time is stretched.
Here’s a forecasting tool to help you get started:
- Create 12 columns marked with the months of the year
- Row 1: Identify all the activities this year that will impact sales (e.g. school holidays, strike season, elections, the seasons etc)
- Row 2:Forecast the business from your current clients
- Organise your profitable clients. It’s likely that the top 20% of your clients make up 80% of your sales. If you are dealing with consumers, segment them and identify which segments make up your 80% of sales.
- Forecast their performance this year: Take a view on growth given the poor economy – say 10% and take your 20% customer segment and grow their revenues over the period by 10%
- Row 3:Forecast sales from new clients against your product/service range
- Take all your products or services and do the same – segment them into the top 20% that brings in 80% of your sales. List them over the 12 month period.
- Identify what promotional activity you want to implement this year and locate these activities over the 12-month period.
- Take a view on what new sales you will generate against your top 20% products/services in response to your promotional activities.
- Row 4: Aggregate your sales forecast for this year by add the expected sales from current customers to the hope for sales of the new customers responding to your promotional activities over the year together. You now have a forecast.
“It will never be right. Every month register what sales you brought in and compare to what you thought you would bring in,” says Phitidis.
“Did you over or underachieve? Ask and interrogate why and in so doing you are developing the intuition of foresight through a most useful tool called the forecast. Go do it now and it will serve you beyond your dreams.”