How to Create a Sales Forecast
Published May 4, 2009 | 
Creating a sales forecast is as much an art as it is science, but nonetheless, it is an important exercise to conduct when putting together a business plan and while there is no standard approach to constructing a forecast, we will attempt to provide a model that you can use and follow in arriving at a projected sales level for your business. You should know in advance this will not produce a single number, but rather many prospective numbers, as with many things in the course of managing your business, rational thinking and logic will ultimately get you only so far, and ultimately, the choice of which number you go with will be made from your intuition.
The first thing to do and constructing a forecast is to get an idea of the average sales levels of businesses similar to yours located in the geographical area you will operate and serve and this is primarily achieved by market research, and some of the more frequently used resources to find this type of information include the US Census Bureau’s Economic Census Data, IRS Statistical Data, RMA Financial Statement Studies (found at most public libraries), Dun and Bradstreet’s Key Business Ratios and Financial Norms (found at the most public libraries), and trade association financial studies and reports.
The final approach to calculating your sales forecast is to set aside your market data and to model your numbers from the ground up on the basis of assumptions and goals and every business basically makes money by selling a unit of product or service at a selling price in dollars, for example, a retail store may sell a pair of shoes for $50, a consultant may sell on our of their time for $100, a service such as an oil change center may sell a service for a flat fee of $30, and in each case, it is a unit times and average selling price.
There are a couple ways to help with estimating sales for a retail establishment including by sales per square foot and by inventory turns and many trade associations in retailing associations publish sales per square foot and inventory turns data, and these numbers can be very useful in not only estimating the sales of your establishment but as a retail management tool as well.
Businesses that work on a project basis can be especially difficult to forecast and businesses that fall into this category include job shops, project based service businesses, contractors, and consultants. For these sorts of businesses it’s important to think of this sales forecast is more of a goal oriented exercise, and also you should try to break down your projects into several different categories, for example, a consultant may break their projects into small, medium, and large projects. They would then estimate what the average small project might bring in for income and what expenses it might take to complete the work, and they would then perform the same exercise for the medium and large projects.
By this point, you have a large array of numbers that you have probably researched and calculated and you have a break even sales level, you have market data about the average sales level of firms like yours and you have a goal oriented sales forecast. You need to keep in mind about the market data is that it is based primarily on existing and established businesses, and therefore, if you are a startup, you may want to keep this in mind as it will probably take several years before you reached these types of sales level. It’s now time for your intuition to take over, and remember, there is no right or wrong answer, however, you should justify your final choice by using your research and the calculations you conducted, and your sales figure it must take into account your business goals, marketing structure, and strategy as much as anything. Finally, you need to think of this more as goal setting rather than predicting the future.
Estimating Market Size
Published May 3, 2009 | 
When launching a business into the marketplace is not a good idea to assume that just because you show up the market gets bigger, since most of your business will come at the expense or loss of market share from the competition, or from their slice of the pie, and the real question is, of course, just how big is the pie? Remember, and market segmentation, any market niche worth considering must be measurable and substantial enough to be profitable, and to test this criteria you must estimate the size of your chosen market segment, also, most formal business plans require you to provide some estimation of the size of market you are targeting as most investors will want some answer to this important question.
Another reason to estimate the size of your market is to test for market saturation and market saturation occurs when there are too many competitors competing for the same market segment, and one way to measure this is to do a peer comparison of like markets and see how many establishments per how many customers there are and to make a correlation to your market.
A good place to begin is with the economic census produced by the US Census Bureau, but before you start, however, you will need to determine the geographic scope of your market including your market’s geographic boundary, and next you would need to know your business NAICS code, and with that information in hand, you are ready to go to the economic census online.
Another way you can estimate the size of your market is to use population figures of your targeted market multiplied by the average expenditure or amounts for the market, and this information is also available at the US Census Bureau’s website.
Another important factor that should be considered when developing your market size and share analysis is the underlying population required to support your business and generally this calculation is also based upon statewide data, and you can approximate this by dividing the population by the number of establishments which will equal the average number of people per business. When you compare the number of potential customers per establishment in your local area to the state average you will be able to tell if there are enough consumers to support your business.
Another method of evaluating your potential and the market is to calculate a breakeven analysis to determine what percentage of the market’s population you would have to capture in order to succeed.
Calculating the size of a business or industrial marketplace is a little trickier, and the best way to approach this problem is by using the Business Expenditure Survey report from the Census Bureau to find what you’re customer spend on your kind of product and services, and using this survey you need to find the business market your business is targeting and the closest respective expenses.
It is important to realize that there is a significant amount of information you can find on the Internet specific to your industry and location that can give you a very close approximation for the size of their market and the average revenue of the industry in your specific state, along with average expenses that you can use to determine benchmark information for comparison purposes when projecting your target market size and its potential revenue.
This information can help you determine whether it is feasible or not to pursue the business project based on both assumptions and market information and all of this information should be included in detail as part of your business plan.
Researching Consumers
Published May 1, 2009 | 
There is a surprising amount of published data on consumers and much of the data is compiled by the US Census Bureau and there are many low cost reports and research tools available from private companies as well, and the following sources of information are all secondary sources of market-research which have the advantage of saving time and reducing data-gathering costs, but the disadvantages are that the data may not fit the problem perfectly and that the accuracy may be more difficult to verify far secondary data in four primary data.
But the Consumer Expenditure Survey (CEX) program at www.bls.gov/cex/ consists of two surveys, the quarterly interview survey and the diary survey that provide information on buying habits of American consumers, including data on their expenditures, income, and consumer unit(families and single consumers) characteristics. For any entrepreneur, knowing what share of their customers disposable income is spent on their products or services crucial and what’s more important is knowing whether that share is going up or down, and the CEX is one to track such consumer trends and spending.
One of the quickest ways to access a lot of consumer data is the American Factfinder found at www.factfinder.census.gov/home/saff/main.html?_lang=en and once you have chosen your market segmentation criteria such as geography or demographics, the American Factfinder is where you can begin to research such consumer segments, and if the numbers produced by the Factfinder are too general to address your research problem then you need to begin to work with Summary File 1 which provides complete geographic detail to the block level.
www.claritas.com/MyBestSegments/Default.jsp allows you to examine the demographic and lifestyle descriptions in detail for every segment in Claritas’ two geo-demographic segmentation systems, MicroVision and PRIZM, and this research engine does a nice job of breaking target ZIP code areas down by demographic makeup allowing you to better segment your market.
VALS (short for values, attitudes, and lifestyles) at www.sric-bi.com/VALS/presurvey.shtml is a marketing and consulting tool that helps businesses develop and execute more effective strategies and the system identifies current and future opportunities by segmenting the consumer marketplace on the basis of the personality traits that drive consumer behavior, and the basic tenet of VALS is that people express their personalities to their behaviors. VALS specifically defines consumer segments on the basis of those personality traits that affect behavior in the marketplace.
Rings studies are demographic surveys presented in one, three, and five-mile slices for a given location primarily used in determining market size for retail-based locations and Easidemographics at www.easidemographics.com/ is the leading provider of mailing lists and consumer leads and their databases can drill down to the extremely deep levels of consumer demographics. The www.InfoUSA.com website provides free lead number reports to detailed criteria and will even produce pricing quotes on your selected list.
For retail-based market locations, it can be helpful to know consumer traffic counts and most states pose traffic counts for major roads on their Department of Transportation website, and these data sets are great for comparing consumer traffic patterns in several locations.
Researching Your Industry
Published April 29, 2009 | 
An industry is a basic category of business activity and the turn industry is sometimes used to describe a very precise business activity (e.g. wind farms) or a more generic business activity (e.g. durable consumer goods), and if a company participates in multiple business activities, it is usually considered to be in the industry in which most of its revenues are derived.
Within any industry there are driving forces at play and best practice set in place and not only must you recognize these facts that most businesses plans require some sort of industry analysis including industry size (how big is the industry and how fast is it growing?), industry threats (what five or six industry trends most threaten our continued success?), barriers to entry (how hard is it to get into our business?), switching costs (how easy is it for a customer to change from one business to another?), and threat of substitute products and services (how big of a threat our products and services that could be substituted for ours, and what are they?).
Three the US Census Bureau, every business and industry category is placed into a numerical industry classification formally called the North American Industry Classification System (NAICS), and NAICS was developed jointly by the US, Canada, and Mexico to provide new comparability in statistics about business activity across North America, and knowing your NAICS code is helpful since most government and private sector secondary data is grouped according to this classification system.
To quickly find your NAICS code, visit www.census.gov/epcd/www/naics.html and enter a keyword or two as to what your business does, and you may then have to work through the returned results to find the category that best describes your primary business activity. Once you locate your primary NAICS code, click on the underlined number and the website will display the full description of your industry segment.
Once you have your NAICS code you can begin instantly researching your industry at the Census Bureau’s American Factfinder website located at www.factfinder.census.gov/servlet/BasicFactsServlet and look under the category heading labeled Economic Census where you will be able to instantly pull industry and geographic quick reports or more detailed statistical data concerning your industry.
The national data book contains a collection of statistics on social and economic conditions in the United States and selected international data are also included, and the Abstract is also your Guide to Sources of other data from the Census Bureau, other Federal agencies, and private organizations. An immense amount of industry data can be found in this reference, and you can research it online at www.census.gov/compendia/statab/.
Within most industries, you can find what are known as trade associations which are organizations that act as greenhouses for industry information and produce industry trade magazines, reports, and trade shows, and there are literally tens of thousands of trade associations in the US alone and there are basically two ways to track them down. The first is to visit your local public library and ask a reference librarian for the Encyclopedia of Associations, or visit the American Society of Association executives at www.asaecenter.org.
Outside of trade associations, there are few big producers of industry reports and information which include the US Office of Trade and Economic Analysis at www.ita.doc.gov/td/industry/otea/, the Bureau of Labor Statistics Guide to Industries www.bls.gov/oco/cg/cgindex.htm#A, and there are a number of online databases and industry surveys available through most libraries for doing industry related research including ABI/Inform Global’s Business Source Elite, Gale’s Business and Industry and InfoTrac databases, and Standard and Poor’s Industry Surveys.
Many industries put on annual or semi-annual tradeshows as forms were industry buyers and sellers can meet and do business together, and to find such tradeshows in your industry visit www.tsnn.com/.
To find suppliers for a particular industry, a great place to start is with The Thomas Register at www.thomasnet.com/ which lists over 170,000 manufacturers and distributors, and ReferenceUSA which can be found at most public libraries.
There are a few databases that record the valuation and sale of privately held businesses and industry transactions including Pratt’s Stats, BizComp’s, and DoneDeal’s, and though these databases are not free, most business appraisers have access to the data reports.