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Sales forecasting for startups

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Johnny Martin started his colourful career running a bar in the French Alps with ASOS founder Nick Robertson. Since then, he’s used his “business numbers brain” to see through major trade sales and prepare business plans that have raised over £25m.

When he’s not running his farm storage business in Somerset, he passionately promotes financial understanding for business startups and has helped thousands of entrepreneurs overcome their fear of the f-word (finance) and bridge the often enormous gap between them and the financiers, bankers and business angels.

Today, Johnny jargon-busts sales forecasting:

Irrespective of the state of the economy, the hardest line of a financial forecast is always the sales line – especially for a startup with no historical data. Once you are up and running, this is usually where your projections start to go wrong, causing a knock-on effect on your projected cash flow, and your ability to raise further finance. Investors hate surprises. So how can you make sure your projections are achievable?

Benchmark Look at the rate of growth of your competitors when they started. If your rate of growth is significantly faster, ask yourself if you can justify it. Are you genuinely a new product category? You can learn what rates of growth are feasible and realistic from other unrelated companies, too.

Break it downBreak the forecast into components by distribution channel (e.g. internet or wholesale) and then by product and use units multiplied by price. By analysing each element, you’re building assurance – and investor confidence because they can follow your logic. 

If your business depends on you building a sales force, then it’s a question of modelling the speed with which a new sales person can build sales. Again, break it down: customer visits multiplied by average sale multiplied by success factor and don’t forget churn (the lifespan of your sales person).

Beware market shareNever ever justify your sales forecast by saying: “its only 0.1 per cent of the market." It’ll land your plan in the bin. Complete investor red rag!

Sense and sensitivitiesTo deal with uncertainty, you MUST do sensitivities. These are the financial what-ifs. For example: what if sales drop by 15 per cent? What if they rise by 15 per cent? I guarantee you will get a request for sensitivities within five minutes of an investor meeting. If you can pull them out, you’ll be ahead of the game. Investors will be impressed by your understanding of managing risk.

What’s your season?Virtually every business has some seasonal pattern – make sure you reflect this.

Don’t underestimate the countdown It is very easy to underestimate how long it takes to win customers – especially to a new company and a new product, and especially in Europe. The biggest strength of US economy is its gung-ho customers who give new products a go. It typically takes four “conversations” to bag a customer (maybe less on the internet), but its still a big cost/resource that you mustn’t underestimate. While you may make a big splash at your first trade show, it will be the second year when you make the sales – factor this into your forecast.

Johnny is an adviser to the Creative Capital Fund; runs “Beginners Guide to Finance” for the British Library and is a visiting finance speaker at the University of the Arts. His fast-paced workshops will help you get past the financial gobbledygook and get your hands on the cash you need to drive your business.

For more information, visit www.johnnymartin.co.uk or post a comment below with your question.Related articles:How to value your businessHow to write a business plan

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