A new year is just days away, 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.
If the idea of running full-scale financial forecasts is a little overwhelming, you're not alone. Generating a forecast is almost 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. If you're looking to forecast sales for the new year, here's what you need to know.
Create a Sales Breakout
Sales can be looked at in a few different ways, including an overall number as well as by line item. In order to get the most realistic estimate possible, breaking things down is highly recommended.
Before jumping into forecasting, determine what you are using as your base. Is it the various revenue accounts? Is it product types? Is it SKUs? Whatever you choose, make sure it aligns with your accounting structure in order to accurately track actual sales against your forecasts. If you plan to make any changes to your chart of accounts in the new year, ensure your forecasts reflect this, too.
Determine a Starting Point
So, for brevity's sake, let's say you made $100,000 in sales in the past year. On average, an inflation rate of approximately 3% can be assumed year over year, so you can infer that next year. Provided all elements of your business remain the same, your sales figures will increase to approximately $103,000.
However, most businesses do not see revenues that are flat 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 Christmas holidays, 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 a distribution established, it's possible to then allocate your periodic projections across each of your sales categories.
Adjust Based on Anticipated Changes
Few businesses stick to the status quo year after year with no strategy for growth and change. If you have any plans to grow your operations in the new year, this will need to be factored into your forecasts as well.
For example, perhaps you are going to be rolling out a new marketing campaign in the hopes of increasing sales in a lagging area by 5%. These expectations can be incorporated into your projections, layered on top of your base assumptions. Declines can be taken into account as well; if you're phasing out a product or switching focus from one line to another, adjust forecasts accordingly.
Be sure to stay realistic about prior year trends. If you had a slump in a previous best-seller last year, it may have been a one-off or a coincidence. However, if you've seen several years of declines, it's important to include this in your estimates.
Incorporate Outstanding Items
No two years are exactly the same. If you have any indication of extraordinary events on the horizon, they will need to be incorporated into your annual forecasts. These can be things like:
- Sales contracts that are expiring
- Sales contracts in negotiation estimated to come through in the next year
- Analyst projections for your industry
- Overall projected changes to the economy
- Political changes, like adjustments to taxes and tariffs or potential challenges with trade
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. By taking the time to determine how much you will spend throughout the year, you can better project profits – and look for places to cut costs should expenses exceed sales.
First, start with your fixed expenses, or the things that are relatively flat, like rent, electricity, water, and property taxes. Then, add in things that fluctuate, like salaries and inventory costs. If you're expecting increased sales in certain areas, be sure to include increased inventory or product costs as well. If you have any interest in building out a forecasted income statement to determine projected net income, this information will be critically important.
There's no perfect way to project sales, but including as much information as possible, building off a solid financial base, and keeping in mind changes to come in the upcoming year can help you prepare.