How to Calculate the Sales Forecast
Published June 4, 2009 | 
Creating a sales forecast is as much an art as it is science and 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, 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 in constructing a forecast is to get an idea of the average sales levels of businesses similar to yours located in the geography you will serve and this is primarily achieved by market research including some of the more frequently use resources that include economic census data, IRS statistical data, and RMA financial statement studies as well as other financial studies and reports.
Economic census data provides the number of establishments, sales receipt levels, and payroll data for a number of industries across many levels of geography for the United States and it is available free from the US Census Bureau at www.census.gov, and to use this data you must first select the general industry in which you operate which are organized by NAICS code.
Next, you’ll want to select the level of geography you are interested in, and a small retailer for example may only be interested in the county or city level of a particular state, where a service that spans the entire country may choose to look at national level data, and you should be aware that the smaller you go down the chain of geography, the less chance you will have of finding any meaningful data. For example, many small counties or cities may not have any available data for your industry if there are a small number of establishments, and in these cases, you need to work at the state level instead.
Once you have found a proper publication for your industry and level of geography, you need to find the category that best describes your business and these categories are listed down the left-hand side of the charts, and although you may not be able to find your exact business description, choose the one that you believe is the closest to what it is that you do, and once you find the best descriptive business category, the chart displays to the right of the number of establishments, the total sales receipts of all those businesses in 1,000s of dollars (very important) and payroll data about the industry.
To find an average sales levels for these businesses, simply take the total number of business receipts found in column 2 and divide by the number of establishments found in column one and the result will be the average sales level of these businesses, and you can use his sales level as one indicator of sales potential in a market, but be mindful that the numbers you find may seem high. This might be true especially if there are a number of very large businesses in the market that may skew the numbers upward, but nonetheless, it does give you some idea of the sales potential of the market and the number of potential competitors.
IRS data provides the number of returns, business sales receipt levels, and they deducted expenses for a given industry sector, and it is available free at www.irs.gov, and IRS data is divided by legal structure of the business in other words by sole proprietorships, partnerships (including LLCs), S corporations, and regular corporations. To begin finding the appropriate sales data, download the packet that corresponds to the chosen legal structure of your business including sole proprietorships, partnerships and LLCs, S corporations, corporations.
Once you have selected the appropriate data and it opens, you will want to forward through into the publication until you begin to see the charts of numbers located somewhere in the middle of the publication, and these charts are sorted in several different ways, as you need to first locate your respective industrial group and the column found on the right-hand side, and be sure and get as close as you can. Next, find the number of returns in the first column and the total business receipts found in the second column, and take the business receipts and divide by the number of returns. The result of this calculation is the average business receipts level for your industrial group by legal structure.
Many of the larger trade associations produce financial data and statement reviews and studies of their member’s financial statements, and usually, these financial surveys are fairly expensive, especially if you are not a member of the Association, but nonetheless, the financial picture they present offers a valuable set of insights about the financial workings of your industry, especially if you are not familiar with the industry to begin with. To find potential trade associations for your industry see the Encyclopedia of Associations available at your library’s reference desk, keyword search your industry Association on the Internet using either www.yahoo.com, or www.google.com, or go to www.asaenet.org/asae/associations_search/.
Once you conduct your market research, it is time to find the breakeven point for business and the breakeven point is the level of sales at which your business covers all of its expenses but makes no profits, and this is an important number to know before you select your sales forecast figures since it will tell you I have time to minimum level of sales that you will need to be profitable.
The final approach to calculating your sales forecast is to set aside your market data and breakeven analysis and to model your numbers from the ground up on the basis of assumptions and goals, as 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 at $75. A consultant may sell an hour of their time for $80. A service such as an oil change center may sell a service for a flat fee of $29.95, and in each case it is a unit times and average selling price.
The basic premise of this technique is to break your sales down into its essential driving components and then forecast a goal for the number of units that you wish to sell, for instance, a cleaning service that sells its services to both commercial and residential customers is dealing with two completely separate income streams, and therefore, you would want to separate commercial customers from residential customers and develop a unique set of assumptions for each.
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 Business Customers
Published May 2, 2009 | 
Business and industrial customers have their own subset of market research data, with a little digging such information can be collected concerning business sales and receipts, expenditures, and operating ratios and the following sources of information are all secondary sources of market research which have the advantage of saving time and reducing data-gathering cost. The disadvantages are that the day to me that the problem perfectly and that the accuracy may be more difficult to verify for secondary data before primary data.
The purpose of the Business Expenditure Survey (BES) produced by the US Census Bureau is to provide periodic estimates on operating expenses for retail, merchant wholesale, and selected service firms and data is collected on operating expenses including payroll and fringe benefits, contract labor cost, taxes and license fees, depreciation and amortization charges, software and other computer expenses, office supplies, repair and maintenance expenses, lease and rental payments, utilities, advertising, accounting, and legal services, and BES is a great way to find out what businesses spend annually on your category of products and services.
The IRS collects and aggregates all business tax returns to produce consolidated financial statement data for businesses grouped by legal structure of the company (sole proprietorship, partnerships, s corporations, etc.) and these tax stats are useful since they report sales and detailed expenses across different industries, and this data is not only useful in finding data about your customers but can also be used to find data about your own industry as well.
The Economic Census profiles the US economy every five years, from the national to the local level and this data can be used to determine the number of establishments, respective sales receipts, and payroll expenditures for businesses grouped by industry and geography, and if you are trying to get an idea on how big your targeted market might be, this is a great place to start since it details the number of businesses that can be found in most levels of geographies.
A quick way to target businesses online is through the Thomas Register which is searchable by product categories, although the database is primarily industrial manufacturers and suppliers, and for retail or service businesses, it’s best to try ReferenceUSA, as this resource is a fairly expensive database but it can be found at most public libraries and it is extremely easy to use.
Financial ratios and financial statement analysis about various industries can be found in three sources (most of which are available at your public library or local Small Business Development Center) including RMA Financial Statement Studies, Dun and Bradstreet Industry Norms and Key Business Ratios, and Troy’s Almanac of Business and Industrial Financial Ratios.
InfoUSA.com is the leading provider of mailing lists and customer leads and their databases can drill down to extremely deep levels of consumer demographics, and the info USA.com website provides free lead number reports to detailed criteria and will even produce pricing quotes on your selected lists.