Buying and Selling a Small Business - Chapter 14 - The Sales Forecast

This is a dangerous assumption--markets and the economy are dynamic, not static--but from the practical point of view, there is little choice. In any case, it is usually over longer periods of time that changing market factors make themselves felt.

Sales Forecast vs. Sales Potential

Sales potential, on the other hand, is a measure of the capacity of the business to reach a certain volume of sales. It is based on knowledge of the market and the extent of competitive influence, and it involves the use of strategy through sales effort. Past sales performance may bear little or no resemblance to sales potential. In general, sales potential is likely to represent a higher sales level than a sales forecast

Length of the Forecast

The Information Needed

In one instance, the prospective buyer of a self-service laundry was unable to get sales figures. He contacted the manufacturer of the washing machines to determine the amount of water used per machine load. He then learned from the water company the amount of water consumed by the business. Using these two figures and making allowances for water used for drinking, rest room, and so on, he computed the number of loads washed per month. This figure multiplied by the price charged per load gave him a reasonably accurate figure for the sales volume.

Short-Term Sales Forecasting

Adjustments have to be made, of course, for any known or predicted conditions that will change this rate of increase--conditions such as unusual weather, short-lived labor disputes, changes in the dates of events such as Easter, and so on.

Distribution of sales by months. A longer method of forecasting is based on the distribution of sales by months. This method works best if the monthly variations over a period of years have been small.

Suppose, for instance, that a short-term forecast is being made in June. For the past several years, sale in July have been between 11 and 13 percent of annual sales, with an average of 12.5 percent. During the same period, May sales have averaged 10 percent of annual sales. Sales during the May just past were $16,000. Then $16,000 div. by .10 = $160,000, the estimated annual sales. Projected sales for July will be 12.5 percent of $160,000, or $20,000. Sales for other months can be forecast in the same way.

Cumulative percents. Another method of short-term forecasting is the cumulative-percent method. The percent of total sales is figured for each week during the past year and added to the percent for preceding weeks, as shown in this example:

Weekly Cumulative

Weeks  %    %
1     .9   .9
2    1.1  2.0
3    1.4  3.4
4    1.7  5.1
5    1.9  7.0
6    2.4  9.4
7    2.6 12.0
8    2.9 14.9
9    3.1 18.0

Number of sales transactions. Where prices tend to vary, the number of sales transactions may show a steadier trend than dollar sales do. An increase in dollar sales without an increase in the number of transactions means that the average dollar value per transaction has gone up. This increase in the amount of the average sale may mean (1) that customers are buying higher-quality goods, (2) that they are buying in larger quantities, or (3) that prices have increased.

If the level of transactions is steadier than the dollar sales, the forecast tends to be more conservative. A study of the transactions may bring to light factors not revealed by total dollar sales.

Intermediate-Term Sales Forecasting

Effect of Changing Market Factors

Conclusions on Forecasting

Can You Make Money with Your Idea or Invention?

Management Publications
U.S. Small Business Administration

Summary

Innovative ideas are essential to business progress. It is very difficult, however, for innovators to get the kind of financial and management support they need to realize their ideas.

This Aid, aimed at idea people, inventors, and innovative owner-managers of small companies, describes the tests every idea must pass before it makes money.

You've Got an Idea? Great!

So, you've had an idea for an invention or an innovative way of doing something that will boost productivity, put more people to work, and make lots of money for you and anyone who backs you? As you've probably heard, you're the kind of person your country needs to compete in world markets and maintain its standard of living. You're the cutting edge of the future.

You are another of those individuals on whom progress has always depended. We all know that it hasn't been huge corporations that have come up with the inventions that have revolutionized life. As the discoverer of penicillin, Sir Alexander Flemming, said, "It is the lone worker who makes the first advance in a subject: The details may be worked out by a team, but the prime idea is due to the enterprise, thought and perception of an individual." Innovators like you are business's lifeblood.

Owner-managers who have started companies on new ideas know first hand about the innovation process. They also know that you can expect to hear....

You've Got an Idea? So What?

In the first place, the chances that you are the first to come up with a particular innovation are somewhere between slim and none. Secondly, even if you have come up with the better mouse trap, nobody--but nobody--is going to beat a path to your door. In fact, in the course of trying to peddle your BMT, you'll beat up plenty of shoe leather wearing paths to other people's doors. You'll stand a good chance of wearing out your patience and several dozen crying towels as well.

Why is it so hard to find backers for your brainchildren? One consultant put it: "Nobody wants unproven ideas. Nobody wants to be first. Everybody wants to be second." Why this fear of the new?

Well, new product failure rates are estimated conservatively to be between 50 and 80 percent. One survey of major companies with millions of dollars to spend on R & D, market research, and product advertising, and with well-established distribution systems found that of 58 internal proposals only 12 made it past initial screening. From these 12 only one successful new product emerged.

Another group set up to help innovators has found that of every 100 ideas submitted 85 have too many faults to bother with. They can be eliminated immediately. Of the remaining 15, maybe five will ever be produced. One of those might--only might--make money.

With odds like 99 to 1 against an idea being a monetary success, is it any surprise that your idea is greeted with a chorus of yawns? People--companies, investors, what have you--are basically conservative with their money. Ideas are risky.

Does that mean you should forget about your idea? Of course not. It merely means that now you're beginning to see what Edison meant, when he said, "Genius is one per cent inspiration and ninety-nine percent perspiration."

Again, those of you who own small firms started on innovations are well aware of the truth of Edison's words. You've been through the hard work.

Can You Exploit Your Idea?

Although coming up with what you think is a sure-fire idea is the biggest step, it's still only the first one. You've got the other thousand miles of the journey to success still ahead of you.