A Beginners Guide To Cashflow Forecasting Part 1: Creating Your Sales Forecast
Posted on 3rd February 2021 at 18:10
Cash flow forecasting is the lifeblood of your business.
You might think that money coming in, your products or your employees are what keeps your business going, but without a good cash flow forecast in place, everything could start crumbling very quickly.
Yet we find that many business owners completely neglect it – seeing it as a formality at best, and a waste of time at worst. So, let me ask you this. Without a cash flow forecast how do you know if you’re covering your costs on a daily or weekly basis? Or if you can actually afford to keep running the way you are? After all, there are lots of ways your accountant can make your business look good on paper, but it takes real money to pay the bills. In the past we’ve seen businesses who thought they were thriving go bankrupt, and be left wondering why, and nine times out of ten, it all came down to cash flow. So, over the next few weeks, we’re going to be going over how to create a cash flow forecast, from beginning to end, to make sure you have no excuses this quarter.
How Do You Forecast Your Sales?
The first step in creating your own cash flow forecast is creating a sales forecast. This is essentially a plan of everything you expect to come into the business over your chosen period.
Depending on your preferences and the type of business you run, you could create a forecast for the entire year, for the quarter you’re in, or even just for one month. Longer sales forecasts are usually broken down into a monthly forecast as well, so you can keep an eye on what you’re spending if you notice sales aren’t going as well as you hoped.
Now, you could just have one line that says, ‘revenue in’ and fill in each month with a single number. That would be fine – but it’s a bit basic. To really get the value from your sales forecast, you want to break it down into individual line items.
This will help you see which products or services are performing well, and which might not be as profitable as you thought. But beware – you can go too far in the opposite direction here and get too detailed. For example, if you’re starting up a café, you might be tempted to write separate lines for coke, diet coke, Pepsi, diet Pepsi and so on. While this would help you work out which individual product is performing well, it would also take up a huge amount of time and quickly become unmanageable and would lead you to abandon the forecast altogether – which isn’t what we’re going for here. So instead, you could group them all into ‘cold drinks’ for the purposes of sales forecasting.
This means you might choose to break your café’s sales down into:
Sandwiches and soups
Cakes, muffins and other sweets
This is the perfect balance between detail and practicality, and still offers you that granular insight into what you are selling best at what times, without going overboard.
For an existing business with sales records, this is probably the easiest part of the whole thing, because all you’ve got to do is take your sales from the same period last year, and tweak/adjust to what you think will come in this year. This gives you a solid base to work from, as you know those figures are achievable (having already achieved them). But if you’re a new start-up you might not have a clue how much you will sell of each of these things – and that’s ok! You can do a lot of research into what similar businesses sold in their first year, what businesses in your local area sold in their first year and how much you think you could sell over your chosen period. The most important piece of advice we could give you when forecasting your income is to be realistic – and not get too carried away with your optimism (or negativity). After all this plan will likely influence how much you spend or invest, and you don’t want to be overspending based on an incorrect forecast. So, remember that these figures should be what you think you can actually sell, not your targets for that period, or what you would like to sell in an ideal world. Stick to what you think you can realistically sell.
A simple way to get started with estimating sales is to use the following technique:
Calculate potential reach per day/week/month (the size of market you can target)
Calculate the proportion that will view your products
Calculate the proportion of viewers that will make a purchase
Multiply this by an average purchase price.
A good example would be an independent shop set up in a shopping centre:
The shopping centre has a daily footfall of 2000 people (reach).
5% enter the shop leading to 100 viewers.
20% of the viewers purchase a product averaging £80.
This leads to a daily income of £1600 and a monthly revenue of £48,000
Don’t Forget Factor in The Extras
Once you’ve got those basic figures in place, you’re nearly there. Now it’s time to take a birds-eye view of your finances and your business and start factoring in anything that might affect your sales during that period. You’re looking for both positives and negatives here.
So, for example, most shops will see spikes around Christmas as people shop for gifts. School holidays often mean café’s will be rushed off their feet during usually quiet times. Will writers, recruiters and travel agents will often see a surge in new clients around January, once everyone has spent some time at home with their family and had time to think about what’s really important to them. If you sell gifts, then key gift-giving days (like Mother’s Day, Father’s Day, Valentines etc), will, no doubt, be a time when business picks up. But if you sell ice creams, you might see a lull in footfall as the weather gets colder. Note down anything that could impact your sales and adjust your forecast based on those.
If you’re an established business, then that’s your basic sales forecast finished, well done! But if you’re just starting up, then there is one other thing you need to factor in – and that’s the time right at the beginning of your business when nothing really happens sales-wise. During this time, you’re networking, marketing and letting the world know you exist – not necessarily bringing in sales. This is known as a ‘sales ramp up’ period and covers the time it will take for you to go from 0 sales to a fully operational business. The length of this period will differ hugely depending on the type of business you are and your location, but it’s important to factor it in and plan for it, so you’re not surprised.
Once you have broken down all sources of income into your business during that period in this way, it’s time to look at the other side of the coin – your costs. But don’t worry, we’ll look at that in our next blog! In the meantime, if you have any questions about how to create your own sales forecast or are looking at your own not sure where you went wrong, we can help. At Deerbridge, we work closely with business owners and executives to help you really get a handle on your cash flow, and use that information to kick-start your growth, making the best business decisions you can along the way.
If you would like to find out more about cashflow management, just get in touch with us today.
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