Budgeting for Future Sales
Predicting sales is one of my favorite things to do when creating a company budget. It’s that time of the year where you get to sit around the table with your fellow decision-makers and map out your dreams for your company.
The foundation for your annual budget planning process is always going to be your sales history as your baseline.
Budgets are an exercise that you dive into the weeds and roll around in them and touch every single one! Make a list of everything and I mean EVERYTHING you sell.
You too service-based businesses! Your services are your widgets.
Set your budget’s foundation
Create a custom sales reports that looks at the quantity sold, the price they sold at, and preferably, you’ll look at this by month for the previous year and this year-to-last-month. Before you turn this raw data into a pivot table, think about whether you can make larger categories within which you can track your income such as:
- Inventory Based Example Categories: Accessories, Design Season, Brand, and Wholesale vs. Retail.
- Service-Based Examples: Contract Type, Hourly fees, Technology Fees, Size, Bulk, and Management Fees
Once you’ve coded your sales to categories, in a pivot table create a hierarchical table by Category, by Item with months as the columns.
Now we can begin to identify selling trends:
- What are your most popular categories? Within that category what is the most popular item/service?
- Do your sales rise and fall at different points of the year as a whole?
- When you hit your highest selling point for the year what external events influenced the popularity or periodic increases? Did you run a special marketing campaign? Did you receive unexpected publicity, like a celebrity rocking your goods? Identify the forces behind your heightened sales.
- Over-time were there any services or SKUs that became less popular?
- How much did your marketing campaigns affect sales?
- Are some items that are your low but steady sellers? In this question, you want to identify what portion of your business can withstand the ebbs and flows of your consumers’ whims.
Once you’ve identified the trends for last year, and this year to last month, we use that information to inform our goals for what will happen next year. We will model your budget in three different scenarios: We shrink, We Stay the Same, We Grow.
The Stay The Same Budget
This is the easiest place for me to start a budget, looking at the trends we just identified we recreate them for the next year.
It’s important here that you budget this by item. What I don’t want to see is a copy and paste of last year’s sales numbers to the cent with no thought about what your business does.
I want you to really think of everything you sell, and how that will perform if everything stays the same. As you’re going through every item, make individual judgment calls as to whether or not you will continue to produce/sell this thing, if it was increasing over the course of this year, is that a trend that will continue for that one thing? What about if it was decreasing? If this item is seasonal, map out your yearly sales with the ebbs and flow of the seasons. Tailor your individual projections to the individual performance.
The basics of your calculations are:
Item A: Sold for $5/unit, in the previous year 1,000 units were sold per month with heightened sales in late spring to early summer. There are no indicators that there will be a change in selling for the next year. Your monthly sales for Item A are $5,000 except in Apr, May, and June where sales are $10,000. Your yearly total sales for Item A is $75,000
Your goal with this first sales budget is for your year-end sales totals to mimic your previous year’s sales trends.
The We Grow Budget
This is the most exciting budget! This is where everything goes right and you get to shoot for the stars; however, you must keep your feet on the ground. Be honest about where you are in the year, your current plans to grow your business, and the success that those plans may bring.
To start, you use the We Stay the Same budget as your base-line. Jump back into the individual items, and think through the steps you want to take to increase the sales. If your efforts pan out increase your sales based on that success.
In addition to extending your current efforts, what are your new products and services you could roll out? Financially map out the execution timeline, initial sales, and new year growth by month.
The We Shrink Budget
This is the toughest budget to create. No one likes to think about how my business could blow up in my face, but you’ve got to plan for it.
You have to be very honest with yourself. What if next year actually doesn’t go as planned? What if my social media marketing has hit a plateau and no longer acquire new customers through my traditional avenues resulting in a decline in sales? What if my largest client hires someone in-house and no longer requires my service? What if…?
When you sit back and think about what sales would look like if things changed for the negative. How does your business continue to do what you do as your company suffers possibly multiple setbacks?
Then map it out! The reason you do this is so when we begin to budget your expenses we discover what levers your company possesses to reduce spending. Setting the company benchmarks for when they must be pulled so your company can stay afloat through a downturn.
When completed, this is your roadmap to your monthly/quarterly/yearly sales goals. These three different scenarios will serve to inform your cost of goods sold and your overhead expenses.
More importantly, your barometer for the entire next year. You can now empower your sales team with sales goals that align with your company’s path. Each month you can see what metrics are you hitting, which scenario is your company operating within, and as a management team, you will be more informed and better equipped to make financially informed decisions for all aspects of your business.
Keep an eye out for next week’s blog: How-to Budget Overhead Expenses.
About the author: Jeanine Hall is the founder of Quant Solutions. As an entrepreneur herself, Jeanine is an active supporter of the startup/entrepreneur ecosystem and enjoys helping others manage and grow their business.
For assistance with your company’s budgets email firstname.lastname@example.org