How to forecast sales as a startup?
Besides getting all glassy-eyed at all the potential money to be made, why is forecasting sales so important? What are the key purposes? How should you do it? How do you use it afterward?
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Here is the content that we will cover in this post. Let’s get started.
- 1. Why Forecast Sales?
- 2. How Far Out Should You Forecast Sales?
- 3. How To Predict Sales For A Startup Business
- 4. Past Performance
- 5. Your Goals
- 6. TAM, SAM & SOM
- 7. Investors are looking for:
- 8. Benchmarking
- 9. Historical Sales x Capital Invested
- 10. Test Sales Metrics x Capital In
- 11. Making A Profit
- 12. How To Show Your Sales Forecasts In A Pitch Deck
- 13. Track, Measure, Review & Recast
- 14. Summary
Why Forecast Sales?
Why should you be forecasting sales as a startup entrepreneur?
The primary reason for forecasting sales is for you. It is one of the most important steps in mapping out a business.
You don’t even know if there is a business there to be created if you don’t work this math. Then is there a big enough opportunity to be worth your time and for the others, you’d want or need to bring on the journey.
This is also a key tool and set of figures for goal setting and focusing on your team. They need to know what they should be shooting for, and what’s expected.
Your sales forecasting process will also reveal what your needs are on the journey. You need to know what type of budget and tools you’ll need to hit those sales goals, and the team you’ll require to make it happen.
Some will say that there is no use in forecasting sales as a startup. This is because things change so fast as a startup. Yet, if you don’t have goals, you really don’t have direction. You’ll be floundering every step of the way.
Other experienced business professionals know these things change. So, more significantly they are looking at your sales forecasts for insights into your thinking, and simply whether or not you know what you are doing.
Do you really know what is reasonable and realistic in your industry? Have you really done your homework? What is your basic business experience? Are you just making numbers up without any authoritative data?
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This can apply to many people you may consider bringing into help from high-level hires to marketing experts, and advisors.
Then, of course, one of the most common reasons that entrepreneurs want to learn how to forecast sales is to present to startup investors and raise capital with pitch decks.
How Far Out Should You Forecast Sales?
Your business will change rapidly. It is often said that you will end up with an entirely new company every 12 months. Your team will change, your product will evolve, your shareholders will change, and so will your plans and trajectory.
Still, you and your team need something to aim for and be guided by. Prospective startup investors will also still expect you to be forecasting sales. Even if this is just a test for you.
Ideally, you’ll be breaking down your sales forecast by month for the first 12 months. Then provide a projection annually for the first 3-5 years. Keep these factors in mind when learning how to forecast sales.
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How To Predict Sales For A Startup Business
There are several methods and metrics to use to forecast sales potential for a startup. These are some of those you’ll find most applicable.
As with your personal financial and credit history, past performance is considered the best predictor of future performance.
So, what existing sales history do you have? What have your average sales been over the past two years?
This is especially relevant to an existing business, and those which are more mature. Other factors to consider here are customer acquisition costs, distribution channels, and contracts for future sales and orders.
As an early-stage or pre-revenue startup, you may allude to your capabilities and profitability by leaning on the resumes of your founding team, department heads, advisors, and existing investors.
For example, if you have a co-founder, marketing experts, and advisors who have created millions of dollars in sales for previous ventures, then the chances are high that they will match that or do better with this venture.
They probably wouldn’t have gotten involved in this project unless they thought it had even greater potential. This is one of the reasons why you should know how to forecast sales.
How big do you want to take this thing?
What are your financial goals? Are you trying to create a million-dollar business? A billion-dollar business? Or A $50B to $100B business?
What does that require in sales and revenue to create that much value? Can you back out the math to make those numbers meet?
Of course, the fundamentals have to be there too. Or you have to have a roadmap to create a market or expand into different verticals to create this much sales potential.
TAM, SAM & SOM
These figures are some of the most important to know before jumping into a new startup business. They will be some of the most important and interesting for potential investors.
This is all about market size and potential. If you don’t know these figures in advance, then you can’t even know you can’t know if there is even a business there. Or if it is big enough to pursue.
This is one of the most common mistakes. You can forecast your dream sales all you want, but if there isn’t enough demand or market share it can be meaningless.
Real estate is a great example of this. In some markets, there are more agents and competitors than there are transactions each month. There just isn’t enough business to go around for everyone to do at least one transaction each month.
Investors are looking for:
- TAM = Total Addressable Market. The entire annual market value.
- SAM = Serviceable & Addressable Market. The segment of the market that is a match for your product. Everyone you can market to.
- SOM = Serviceable & Obtainable Market. Who you can market to, close and service well enough. The group which is within your initial target marketing group.
What are reasonable amounts of sales volume given benchmarks within your industry?
For example, if the current market leader in your established industry only holds a 30% market share, it may not be reasonable to forecast much more than that. In most industries, 80% or more of the market share is only going to be held by the top 10% to 20% of performers. So understand carefully how to forecast sales for your industry.
Other metrics and data benchmarks that can help you forecast sales figures include:
- Customer acquisition costs
- Marketing and lead conversions ratios
- Costs of goods sold
- Revenue per employee
- Length of the sales cycle
Historical Sales x Capital Invested
An easy way to forecast sales (if you have them), and to show investors the impact and potential returns on their capital is to multiply your current performance by new money in.
For example, if you are running a $10k a month marketing budget, with predictable results, it may be reasonable to deduce that every additional $10k put towards marketing should produce double those results.
Of course, there are other factors at play, such as market share, maximum visibility by channel, inflation, and the discounts available for bulk media buys.
Test Sales Metrics x Capital In
You may not have much depth in sales history, but hopefully, you’ve at least run some tests.
If they have been profitable enough to warrant pursuing this venture, you can break these tests down by stage, and by the amount of capital invested into your marketing budget.
- You’ve put $X into certain ads
- You had ___ number of clicks and landing page visitors
- Which results in ____ number of leads calling, messaging, or filling out your form
- Which in turn yielded ____ number of actual sales closed and completed
By multiplying your input from new money from investors you should theoretically be able to multiply results predictably.
Of course, this also relies on sufficient advanced testing over time and in enough volume to provide reliable data and factoring in any changes in future ad performance. Use these tools when learning how to forecast sales.
Making A Profit
Another way to approach sales forecasts is not from your lofty aspirations and goals, but from your needs. How many sales do you need to run a reasonably profitable business?
Start with your expenses. What is that monthly overhead that you need to cover? How much of a profit margin do you need to be making on top of that to have a safe and attractive business? Can you lower costs?
The caveat here is that startup investors typically are not going to be excited about average businesses that are just making status quo profit margins and sales.
If they were going to invest in a business like that, then there are probably plenty of competitors who are more established and safer investments.
Still, make sure you are looking beyond sales volume in units. More sales don’t always mean more profits. To look at real revenues and profit margins, and build in a cushion for error and change.
Also, look at different types of revenue opportunities. Look at one-time versus recurring, subscription, lifetime value revenue. As well as upsell and premium conversions, and other future business lines.
Estimating your sales forecasts is a part of the process of how to create a marketing plan. Check out this video I have created explaining a bit more in detail about how that works.
How To Show Your Sales Forecasts In A Pitch Deck
Aside from your own internal uses, one of the top reasons to forecast sales is for use in pitch decks when fundraising from angel and venture investors.
Your sales forecasts belong on the financials slide. This usually comes in around the middle to the latter part of your pitch deck.
Keep it simple. All you need is a basic spreadsheet-style chart showing projected sales, revenues, profit margins, and profits or net income. Don’t overcomplicate it.
This is just to give investors an idea of your goals and plans and the potential they can expect from their investment.
Be sure to include any assumptions you used to create these projections in your appendix or virtual data room.
For your own records and to back this up you may even want to use financial modeling software to play with different potential scenarios and know the worst-case and best-case scenario.
Other parts of these numbers will show up in your market size slide, product-pricing, and business models, and marketing plan. They’ll also help you when figuring out how to forecast sales.
Track, Measure, Review & Recast
Like your business plan, your sales forecast is not a set it and forget it task. It should be a dynamic document.
Constantly be tracking your actual sales, as well as the metrics that come before and afterward. Be tracking your marketing and advertising performance over time. How is this changing?
Then watch how that is changing on the back end. How is profitability changing, including the variable cost of goods sold?
Big events, macro changes, and shifts can also call to recast forecasts for sales. In turn, know what changes you may have to make to survive contractions or scale quickly to meet growth and own new market share before someone else steps in.
Learning how to forecast sales is a core part of starting any business. It is also a fundamental part of business planning, and especially fundraising for startup capital.
There is more than one way to forecast sales. Check out these methods, and find the one which is most applicable to your situation, and what you are using these financial projections for.
Then stay on top of updating them and stay ahead with adjusting your business for changes in your sales forecasts.
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