Neil Patel

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How to forecast sales for your business?

Forecasting sales is an integral part of operating any form of business. You can’t expect to keep operating without knowing your sales forecasts or how to reach your goals.

The need to be forecasting and evaluating your sales is something that never goes away. Yet, it may be even more important for younger startup companies. Those more delicately balancing their finances on all sides. One month of getting it wrong can ultimately send you out of business.

This is even more critical if you are a startup founder who is hoping to raise money for your venture. Sales forecasts will be pivotal in being able to secure investors, and who those investors are. As well as how much they will give you, and on what terms.

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    The Need For Sales Forecasts

    There are actually many reasons to run sales forecasts, and ways that they will help you better operate your business.

    This includes the following.

    Understanding Your Income

    Sales mean income, right? You need to know what money is going to be coming into your business. Even more importantly, you need to know when it will be coming in, and how much.

    This is critical for being able to understand your cash flow. Including being able to make sound decisions about taking on debt financing, making investments to expand your business, being able to budget for marketing, and the other things you can afford. Including whether this business is going to produce enough income to enable you to be able to continue to afford to work on it.

    Knowing how to forecast sales for your new company is one of the key aspects of your business model. If you need more information on what is a business model, check out this video I have created.

    Understanding Your Expenses

    Making sales costs money. If you want a certain amount of sales, you are going to have to spend money to get them.

    You should intimately know your unit economics, and what it takes to achieve the volume of sales that you have forecasted for a given period.

    In addition to direct marketing costs, there is also the cost of goods sold. Those may be slim if you have a licensing business model, or are a SaaS tech startup. It can be dramatically higher if you are manufacturing your own product, or have to move it and deliver it too.

    What many newer entrepreneurs do not get is that their best month for sales can actually be the most brutal month for trying to make ends meet. It is often the time when they are most likely to go bankrupt.

    Imagine you have 10x the amount of orders for next month. Can you afford to fill those orders?

    It can be a good problem to have, but it is still one which requires your attention.

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    Determining The Amount Of Capital You Need

    If you have certain sales goals or expectations, then you can reverse calculate how much capital you will need. Then get ahead of that need by finding that financing in enough time.

    This may come from raising equity capital, debt financing, factoring, merchant cash advances, and other working capital loans and credit facilities.

    Understanding Your Team & Infrastructure Needs

    Not only are there direct monetary needs to facilitate and handle sales, but there are also real human resources, and infrastructure needs to handle these sales.

    You can forecast grand amounts of sales volume, and perhaps even spend the marketing money to generate the inbound, but those leads, inquiries, users, and customers can require a lot of infrastructure and service. That’s even true of tech and software startups, and service businesses.

    You need the software, CRM, bandwidth for communications, team members, file storage, and more to handle orders, fill them, and ensure those customers are being served very well. Once you have the processes set up, you’ll find it much easier to forecast sales for your business.

    Demonstrating The Potential Value & Returns For Investors

    Your sales, user counts, and revenues, directly impact the value of your company. Your forecasts for how your sales will change also determine the returns that investors in your business can expect.

    This will determine what types of investors will be interested in investing in your business and are worth spending your time on pitching.

    A part of this is also which investors will be valuable for you to have on board to manage your company at that level of sales and to get to the next level.

    Your revenues and value, in turn, directly impact things like which potential acquirers will determine whether your company is worth looking into buying. As well as when you may be eligible to go public and go through an IPO to be listed on various stock exchanges.

    Completing Your Pitch Deck

    You need to forecast your business sales in order to complete your pitch deck and go out fundraising.

    Even if you are a brand-new venture that has made no sales, and has no revenues, you still need to include sales in your financial forecasts.

    A business exists to make sales, earn revenues, and generate a profit. It may do a lot of other things too, but without this, it is not a business.

    How To Forecast Sales For Your Business

    So, how do you go about forecasting sales for your business?

    There are a variety of methods and starting points for forecasting sales. Much will depend on how much progress your company has made so far.

    Historical Sales

    If you have a couple of years of operating and sales history, then you have some tangible data to base your future sales expectations on.

    Both existing financials and financial forecasts should be included in your pitch deck and fundraising materials.

    The more data you have, the more accurately you can forecast sales for your business through various seasons, and economic rotations.

    Customer Acquisition Costs

    Customer Acquisition Cost (CAC) is a very important business and startup metric. If you have some sales that have gotten you to the point of being able to nail down your CAC and unit economics, then your sales forecast is really a multiple of the budget you are allocating to your marketing and sales departments.

    If you know it costs you an average of $1,000 per new customer, and you budget $10,000 for marketing next month, you may assume that you will achieve 10 new sales.

    Even if you have just conducted early tests, you have some data to base sales on. Including your conversion ratios at each stage of the sales process. As you scale, you also hope to improve your efficiency and economics.

    Current Performance Multiplied By New Capital Invested

    If you are out in fundraising mode, then you can scale your forecasts based on how much new capital you are aiming to raise in this round.

    This may be a combination of the marketing budget and your unit economics. It may also include expanding into new areas and market segments. Or even acquiring other companies and their sales and customers.

    Reverse Engineering Your Goals

    In other cases, brand new ventures may be starting out with their goals, including the financial metrics they desire to achieve. If you only want to go on this journey if it will become a $1B business, then you can reverse engineer the sales that it will take to get there.

    You will break that down by the sales you need to make, and in turn, the capital that needs to be raised and invested to get there.

    Just keep in mind that you will typically only be forecasting the next three years of sales in your pitch deck. Five at the most.

    How Do You Show Your Sales Forecast In Your Pitch Deck?

    One of the chief reasons for sales forecasts is for use in your pitch deck and for raising capital.

    This will still be a staple of your fundraising materials no matter whether you are raising a Series A round, or a Series C.

    So, what is the best way to present your sales forecast in your pitch deck? In other words, how would you forecast sales for your business in the investor pitch?

    Where Does It Fit In Your Pitch Deck?

    Your financial forecast slide fits into your pitch deck right after your existing and historical financials slide or slides.

    This is typically a little more than halfway through your presentation. Right before your amount is raised and use of funds slides.

    Note that investors normally spend the most time on your financial slides. Likely at least 10% or more of the entire time they will invest in looking through your deck.

    What Goes On Your Forecast Slide?

    Remember, that the guiding principle of designing an effective pitch deck is to keep it simple and fast to digest.

    These may be the most complex and dense slides in your pitch deck. Yet, every effort should be made to keep it lean and clean. You want investors to focus on the one main data point where your company stands out ahead of the competition.

    Just stick to a few key line items in a spreadsheet on this slide.

    If you have more complex financials, with multiple product lines, revenue sources, and subsidiary businesses, much of this can be detailed in your virtual data room. Which will be reserved for serious investors ready to take a deep dive, give you a letter of intent or term sheet, and begin their due diligence.

    Balancing Thinking Big & Reality

    You and your investors want to think really big and aggressively. Your startup needs to be growing at a pace of 100% or much more during the early days. Far more mature startups that are ready to go public or be acquired by private equity firms may have much more moderate growth rates, but the total numbers will be far, far larger.

    Unless your sales forecasts represent the level of returns your investors crave and need, including the room to fall a little short, you just are not going to be a candidate for their funding.

    At the same time, you must have a real, tangible, and feasible plan to achieve those sales, with some basis in reality and basic math. Be sure that you can connect these dots. Once you have the plan in place, working out how to forecast sales for your business will get easier.

    Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

    Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

    How To Support Your Sales Forecasts

    There are a variety of other ways to support and back up your sales forecasts throughout your pitch deck and fundraising materials.

    In addition to your historical financials, this certainly includes your traction and customer slides. Who your customers are makes a big difference. Are you going after individual retail customers one by one? Or are you targeting enterprise customers, which can bring thousands or millions of sales with each new client onboarded?

    Your traction graph should also instantly project your trajectory.

    Your team, including executives, cofounders, and advisors, will greatly impact what investors see as the potential for your startup. If your new CEO just came from a big corporation that was doing $100M plus in annual sales, that is going to go a long way. Versus just you coming right out of college with zero sales experience.

    Your market slide, size of the market, and trends also play a role here. A big, fast-growing market makes large sales forecasts far more achievable.

    You can also cite sources in your appendix for the assumptions and benchmarks you used in your forecast. Presenting this information adds credibility when you want to forecast sales for your business.

    Other Important Metrics For Your Startup

    Other important metrics that investors will be looking at include:

    • Revenue forecasts
    • Headcount
    • Customer retention versus churn rate
    • Recurring versus one-time sales and revenues

    Summary

    Forecasting sales is one of the essential fundamentals for any business and business owner. There are several ways to calculate your sales forecasts. Largely depending on the data, you have collected so far.

    Equally important as the numbers are how you present and support your sales forecasts in your pitch deck and fundraising materials.

    You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.

     

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    Neil Patel

    I hope you enjoy reading this blog post.

    If you want help with your fundraising or acquisition, just book a call

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