How to Forecast your Sales And Gross Profit

Development of your profit plan should usually begin with a forecast of your expected sales and gross profit for the coming year. The sales and gross profit must be considered together since they are so closely interrelated. Gross profit percentages are determined by pricing policy, which also affects expected sales volume. A decision to increase the expected gross profit percentage will usually tend to decrease expected sales, while reducing the expected gross profit percentage should increase sales.

A second major reason for beginning the profit plan with a sales forecast is that the volume of expected sales often determines a number of other factors such as the following:

Expected changes in variable expenses, those expenses that tend to change in direct proportion to changes in sales. These could include expenses such as sales commissions or delivery costs.

The impact of the added sales volume on the various fixed costs of operating your business. These costs, by definition, do not tend to vary in direct proportion to changes in sales volume. However, substantial increases in sales over an extended period can force an increase in many fixed expenses. For example, a sales increase realized through the addition of many new accounts could affect bookkeeping and credit costs.

The ability of present resources such as storage space, display area, delivery capability, or supervisory personnel to accommodate the added volume.

The need for funds to invest in increased inventory or accounts receivable to accommodate sales increases.

Cash generated from operations to meet current operating needs as well as expansion requirements, debt repayments, and owners' compensation.

Realism

A realistic sales forecast must rely on careful analysis of market potential and the ability of your business to capture its share of this potential. The forecast should not be based upon "what you would like to do" or "what you hope to do." It must be "what you can do" and "what you will do."

Any forecast of a sales increase must be supported by realistic expectations for stronger market demand and specific marketing steps that will be taken to capture a share of this market.

The key to successful forecasting is realism. You only fool yourself if you reject reality in forecasting. Such fore?casts serve neither as a realistic planning basis nor as a reliable means of performance evaluation.

Your forecast can be the basis for important decisions such as decisions to add personnel, lease additional facilities, or increase promotional costs. If these decisions are based upon unrealistic sales expectations, any money expended on them will be wasted.
Forecasts are often presented to lenders or potential investors to guide them in their decisions. If they lack confidence in your forecast, they will certainly be reluctant to commit their funds to your business.

Every forecast should be supported by carefully considered, specific action plans. It is inadequate to forecast a sales increase of 20% or 30% without plans for specific actions to achieve the increase. These actions could include the introduction of new products, opening of new branches, market expansion, commitments from new customers, increased requirements from existing customers, additional salesmen, or an intensified promotional effort to attract new customers.

Analyzing Current Sales and Gross Profit

Your sales and gross profit forecast begins with analysis of current performance. Sales are usually divided into various categories. Each category is examined individually to determine expected sales for the coming year.

Selecting Sales Categories

The selection of categories will depend upon the nature of your business. For example, a food broker selling to a large number of relatively small accounts might be interested primarily in analyzing sales by product. The owner of a single retail store might choose to analyze sales by selling department, while the owner of a retail chain would probably be interested in analyzing sales by outlet. An insurance broker with several agents might categorize sales by agent. An individual wholesaler might consider sales by sales territory.

Factors Affecting Sales

After categories have been selected and current sales divided among them, the various factors which can affect sales in each category must be considered. These factors could be either internal or external. Internal factors are those that you can influence. External factors are those that affect the market served by your business, but are generally beyond your control.

Internal Factors

The following are typical internal factors that could influence your sales forecast:

Promotional plans

Expansion plans

Capacity restrictions

New product introductions

Product cancellations

Sales force changes

Pricing policy

Profit expectations

Market expansion to new customers or territories

External Factors

Among the external factors that must be considered are the following:

Business trends

Government policies

Inflation

Changes in population characteristics

Economic fortunes of customers

Changes in buying habits

Competitive pressures

Analyzing Gross Profit Percentages

It is often useful to begin a sales forecast with an examination of your current gross profit percentage (markup percentage or gross profit percentage). The gross profit percentage is usually the best indicator of pricing policy which can have significant impact on sales volume. To some extent, the gross profit percentage will also reflect the buying economies of your business. However, the range over which costs of purchased goods will vary is not ordinarily as wide as the possible range of prices you may seek for your products.

Three Bases of Comparison

Examination of current gross profit percentages can indicate the need for pricing policy revisions to meet competition or closer attention to purchasing costs in order to provide extra gross profit without increasing prices.

The evaluation of gross profit percentages requires comparison of current performance with three bases:

Objectives originally set for the current year, if available

Other businesses in the same industry

Results of prior years

Comparison with objectives permits you to determine how well you have done compared with your original expectations. Assuming that these objectives were realistic, this is often the best single performance indicator. Deviations from objectives can quickly be identified and explored in detail to determine the cause of the deviation.

Comparison with industry averages permits identification of areas where the experience of similar businesses indicates room for improvement in your own.

Since the owner of Your own company you deal with problems on a nearly daily basis. Being comfortable with effective Problem
Solving Techniques can dramatically alter the development of your business.

Even though you Find solutions to your problems, many businessmen and women aren't really skilled in the methods of problem
solving, and if solutions fail, they fault themselves for misjudgment. The issue is typically not misjudgment but rather a lack of
ability.

This manual Instructs you in some problem solving techniques. Critical to the success of a company faced with problems is your
comprehension of what the problems are, setting them, finding answers, and selecting the best answers for your situations.

What is a problem. A dilemma is a situation that presents difficulty or perplexity. Issues are available in many shapes and sizes.
By Way of Example, it may be:

Something did Not function as it should and you also don't understand how or why. Something you will need is unavailable, and
something has to be found to take its place. Employees are undermining a brand new program. The market isn't buying. What do you
do to live? Customers are complaining. How do you manage their complaints?

Where do Issues come from? Problems arise from every aspect of human and mechanical functions in addition to in nature. Some
problems we cause ourselves (e.g., a hasty decision was made and the wrong individual was chosen for the task ); other problems
are brought on by forces beyond our control (e.g., a warehouse is struck by lightning and burns down).

Problems are a Natural, regular occurrence of life, and in order to suffer less from the tensions and frustrations they cause, we
need to find out how to deal with them in a reasonable, logical fashion.

If we accept The fact that problems will appear on a regular basis, for many different reasons, and by an assortment of sources,
we could: learn to approach problems from an objective point of view; find out how to expect some of these; and stop a number of
them from becoming bigger problems.

To accomplish This, you have to learn the procedure for problem solving. Here, we'll instruct you in the basic procedures of
difficulty. It's a step-by-step manual which you can easily follow and exercise. As you follow this manual, you will eventually
develop some strategies of your own that work in concert with all the problem-solving process described in this guide.

Keep in mind, However, as you read that this isn't a thorough analysis of the artwork of problem-solving but rather a practical,
systematic, and simplified, yet powerful, method to approach problems contemplating the limited time and advice most business
owners and managers have. In addition, some issues are so complicated that they require the further help of experts in the field,
so be prepared to accept the fact that some problems are beyond one individual's ability, skill, and desire to be successful.

In order to Appropriately recognize the problem and its triggers, you have to do some research. To do so, simply list each of the
preceding queries in checklist form, and maintaining the checklist useful, go about collecting as much information as you possibly
can. Keep in mind the relative importance and urgency of the problem, in addition to your time limitations. Then interview the
people involved with the problem, asking them the questions on your checklist.

When You've Gathered the information and reviewed it, you'll have a fairly clear understanding of the issue and what the
significant causes of the issue are. Now, you can research the causes further through observation and additional interviewing.
Now, you should summarize the problem as briefly as you can, list all the causes you've identified, and record all the areas the
issue appears to be affecting.

Now, You are prepared to assess your comprehension of the problem. You have already identified the problem, broken down it to each
of its facets, narrowed down it, done research on it, and you're avoiding typical roadblocks. On a large pad, write down the
problem, including each the factors, the areas it affects, and what the consequences are. For a better visual comprehension, you
might also wish to diagram the issue showing cause and effect.

Study what you Have written down or diagrammed. Call on your workers and talk about your investigation together. Based on their
opinions, you might decide to revise. Once you think you completely understand the causes and consequences of the issue, outline
the problem as succinctly and as easily as possible.

Go through your Long list of alternatives and cross-out those that obviously won't work. Those ideas are not wasted because they
impact on these ideas that stay. To put it differently, the very best ideas you select may be revised based on the ideas that
would not work. Together with the remaining solutions, use what is known as the"Force Field Analysis Technique." This is
fundamentally an analysis technique which breaks down the solution to its positive effects and negative effects. To do so write
each solution you're contemplating on a separate piece of paper. Beneath the solution, draw a line vertically down the center of
the paper. Label one column benefits and one column disadvantages.

Now, some more Analytical thinking comes in to play. Analyzing each facet of the solution and its influence on the problem,
listing each of the benefits and disadvantages you can think of.

1 way to help You think about the advantages and disadvantages would be to role-play each solution. Call in a couple of your
workers and perform out each alternative. Ask them to their own reactions. Based on what you observe and on their feedback, you
will have a better idea of the advantages and disadvantages of each solution you're considering.

Once you Complete this procedure for each solution, pick those solutions that have the Many advantages. Now, you ought to be
considering only three or two.

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