• How-to

When you are starting up, cash flows are very important. This involves prediction of both costs and revenues. Once you start operating your venture, you may have some idea about the costs and administrative overheads you may incur. However, as far as revenue is concerned, there is a certain amount of prediction involved.

Revenue is a product of price (of product or service) and quantity. The price can be determined by the entrepreneur internally; it is often the quantity that demands the use of fine judgment and forecasting techniques. Here’s how a startup can forecast its sales quantity (directly based on the demand in the market) effectively.

Assess macro/external factors
For a startup, forecasting the sales for the first month/year is the most difficult task as there is no trading history to fall back upon. To get started, you should look at the macro environment your company is going to operate in. What is the state of the economy? Does the demand for your product/service swing with the state of the economy? Are you trying to fulfill an existing need in the market? Getting the answers to such questions will give you a better idea about the demand for your offering in the market.

Evaluate internal factors
Internal product and pricing decisions affect demand. In fact, economics says that there is a direct correlation between the price of the product and the demand for it. Is price your main distinguishing factor? Or are you offering unique features such that the resultant higher price will not be a deterrent for buyers? What is your go-to-market strategy? How will customers access your product? Answering these questions will help you narrow down the internal factors which act as demand determinants.

Get the facts in place
There is always a certain fact element involved in demand/sales forecasting. For example, you can determine the size of your target market in two ways. You could adopt a top down approach or a bottom up one. George Day defines the top down approach as one where you start with the total population as a base and narrow down to a particular market segment. Day describes the bottom up approach as one where the habits and usage patterns of individual customers are studied and generalizations arrived at. You could also do factual surveys and study competitor balance sheets to determine the likely demand for your offering.

Weave in judgment
You need to analyze to what extent the above external and internal factors will influence demand. You should also factor in seasonal and cyclical variations that may affect demand. With a certain judgment and after considering various facts, you can predict the sales forecast for the first month of operations. Once you have that, you have to extrapolate for the future.

Build a history of trading
This happens by rolling out actual operations and selling. Once you complete a year of operations, your books will show your trading history. Now, it will become easier to forecast demand for the years ahead.

©Entrepreneur December 2010

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demand, forecast, How-to, sales