Treat your Business as a Startup – Five Steps to Creating an Accurate Sales Forecast

By Simon J Blattner, III

Edited by: Elizabeth Conlisk

In our last post, we made the case for treating your business as a startup to help you navigate the new normal in our post-pandemic economy. We recommended starting at square one. Use your current resources and take a good, demanding look at all the elements of your business before deciding whether you’re going to reopen.

This post is about examining your sales, and the five steps you need to take to create an accurate forecast. This will help you identify the resources you want work with, and how much you’ll have available to spend on materials, labor, rent and people.

1.       Identify and integrate ”Thought Partners” within your team

2.       Contact your Top Accounts

3.       Estimate potential sales by account/by month

4.       Estimate your Cost of Goods Sold

5.       Create a gross profit forecast

Step 1.  Identify a small team who knows your business and your customers well.  Integrate them into your thinking.  Certify they are true “Thought Partners,” that is, they share a mindset with you about your business.

Step 2.  Review your sales history by month for the last three years. List your biggest accounts in order, from largest to smallest. Group the accounts that make up 80 percent of your sales into one bucket and call the rest “all other.”

The easiest way to reset your sales budget is to look to the past and thoroughly examine the relationships between your largest accounts and all others.

 Start reaching out to your customers and have honest conversations. Most are experiencing the same uncertainty you are.  Ask them how they see their business unfolding in the future.  In some cases, you may know your customer’s business better than they do.

Step 3. Analyze your conversation. Was it too optimistic or pessimistic?  What was the tone of the conversation? Once you’ve validated your forecast with your customer and are satisfied that you believe the numbers you’ve written down, discount them by at least 10%, maybe more.  This is a conservative forecast.

Create estimates for those accounts you’ve identified that comprise your 80%.  Forecast each of them by month for 12 months forward.  You’ll need to “guesstimate” the other 20%.

Step 4.  Every company, whether they are professional services, equipment, paper rolls, telephones, lunch boxes or screws, has a Cost of Goods Sold.  If you don’t know what your costs are, now is the time to figure them out.  Add your cost of materials if you have them, your cost of labor, and apply some overhead. That number is your Cost of Goods Sold.

After you’ve subtracted your Cost of Goods Sold from Net Sales, you have Gross Profit. From there, you should be able to figure out your Gross Profit by customer.  Do you know what each customer buys?  The relative percentage of Gross Profit to Net Sales is Gross Margin.  (You’ll need to know that later.)  Write down your Gross Profit by Customer using your discounted Net Sales Number.

Step 5.  At this point, you’ll have your Sales and Gross Profit forecast by Customer for the year.  Some businesses are seasonal.  Lay out your sales and gross profit forecast by month.  Sales dollars per month.  Gross Profit dollars by month.  You have your Sales and Gross Profit budget.

 This Gross Profit budget allows you to forecast your Operating Expenses and Interest Expense.  In our next post, we’ll show you the five steps to creating a monthly Operating Expense budget.  At that point, you’ll have a basis to analyze and review again with your “Thought Partners.”

This process can be tedious and you may get frustrated, but you need to know how much you can spend.

If you want to keep your business, you’ll take this step to treating your business as a startup.

June 8, 2020

Simon (Buddy) Blattner is president of GLSB, Inc., a consultancy that uses a proprietary system that small and medium-sized companies can use to assess their business in less than 30 minutes a month to drive faster decisions and better results. Buddy has been a business owner, CEO, COO and CFO in manufacturing, wholesale distribution, and branded distribution.

Elizabeth Conlisk is a project partner at M. Harris & Co., a communications and marketing firm that helps clients find the right words to describe what they do, how they do it and why they matter. We preach brevity and clarity because organizations that tell simple, compelling stories win more business. Elizabeth was the founding communications VP at the Big Ten Network in Chicago.