Month: January 2013

The daily capacity method of forecasting sales

Last week, we talked about the market share method for forecasting sales. Now, let’s take a look at the second sales forecasting method: the daily capacity method.

Daily Capacity Method

With method of developing a sales forecast, you estimate what you think you could sell on a daily basis. Let’s go back to Jill and Lauren, the flower shop owners we talked about last week. They could estimate the number of customers coming into their shop to make a purchase of flowers or accessories, and the number of flower arrangements sold over the phone for delivery on a daily basis.

Here’s what their sales worksheet looks like:

Product/service Price Units sold/day Total Sales
Floral arrangements by phone $75 5 $375
Floral arrangements in person $60 5 $300
Accessories, home décor $35 10 $350
Cards $4 5 $20
Total estimated daily sales $1,045.00

Assuming the business will be open six days of the week, every week of the year (or 312 days), Jill and Lauren can estimate their annual sales by multiplying 312 days × $1,045.00 to get $326,040. This estimate should also be adjusted for seasonal sales, economic conditions of the region, and so on.

What next?

Both the market share and daily capacity methods of sales forecasting are appropriate. Whichever one you decide to base your forecasting on depends on the quality of your data. Start by talking to people who own similar businesses (though you might not get much help from local competitors – try another part of the city). Talking to people who know the type of business you want to operate will help you validate your annual sales estimates.

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The market share method for forecasting sales

We believe that small business owners should make sure their business models can sustain an income from day one. We’re not suggesting you go out and buy a jet with your business profits, but we do believe that you should be able to live comfortably as a small business owner right out of the gate. However, that takes planning. And lots of it! So let’s look at one of the most important tasks of pre-venture planning — the sales forecast.

There are two methods for creating a sales forecast. This week, we’ll talk about the market share method.

Market Share Method

In the market share method, the sales forecast begins with an estimate of market size. This is the total number of consumers or businesses in your trading area that would be interested in purchasing your product or service. It’s your target market, but with a number attached to it — how many are there?

Once you have your market size, you need to estimate their consumption — how much are they currently buying? You can get information on past consumption through primary market research or secondary market research.

When you have an estimate of the number of buyers in your area and how much they buy each year, you can estimate total market demand by multiplying the two numbers together. For example, Jill and her sister Lauren want to open a flower shop. Their city has 100,000 households, but not everyone in the city would travel to their shop. So they assumed that only people who lived within five kilometres of their flower shop would want to do business with them.

Here’s market demand for Jill and Lauren’s flower shop:

City Size = 100,000 households
Market Size = 10,000 households live within five kilometres of their store
Annual Spending per household on floral arrangements = $140 (from local statistics)
Total Market Demand = 10,000 households × $140 spent per year = $1,400,000

Market demand vs market share

Market demand is not the same as market share. If Jill and Lauren open their shop, it will make theirs the seventh flower shop competing for the total market demand for flower arrangements. So, assuming all competitors are equal in size and competitive advantage, and that Jill and Lauren could jump right into business without any retaliation from competitors, they could potentially earn a one seventh share of the total market demand for flowers. So how does that translate into estimated sales for them?

Total Market Demand = 10,000 households × $140 spent per year = $1,400,000
Estimated Market Share = 14%
Estimated Sales for one shop = $1,400,000 × .14 = $196,000 in sales.

So, using the market share method of sales forecasting, Jill and Lauren (and hopefully you!) see the potential revenue for their shop. This estimate should be adjusted to account for seasonality, special events (like Valentine’s Day flower purchases), and general economic conditions of the region, weather, seasonal changes and holidays. It’s impossible to predict the factors that will most likely impact sales, but you should try to account for them in your sales forecasts.

Coming up next week: the daily capacity method! See you then.

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business-start-up-costs-canada

Why do you need a business number?

In Canada, a business number (BN) is something you’ll need for GST/HST, payroll, corporate income tax, import/export or other business accounts with Canada Revenue Agency (like registered charity, excise tax, excise duty, insurance premium tax, or air travellers security charge).

You’ll be assigned a BN when you register your small business. This business number will have 15 digits, consisting of two parts: the registration number and the account identifier. Your account identifier may be either RT (GST/HST), RP (Payroll Deductions), RC (Corporate Income Tax), or RM (Import/Export) and will be followed by a 4-digit account reference number. You’ll need your business number when making payments or enquiries related to your account.

While the whole thing might sound complicated now, registering for your business number is easy – it can be done by phone, internet, fax or mail.

Keep in mind, not all small businesses need a BN. If you’re unincorporated and operate your business under your own name, you don’t register with the government, and therefore you don’t need a BN!

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From the archives: Six small business lessons learned

dr-leslie-robertsThe new year is already underway, but we’re still in a reflective mood. We thought we’d share one of our favourite ever blog posts: Six things I learned about business in 2010, by our own Dr. Leslie Roberts. In this entry from 2011, Dr. Roberts shares some pretty important lessons she herself learned about small business in the year prior. We like that her insights are still as relevant today as they were then, and that the lessons were learned from her own entrepreneurship experience. As you likely know, your entrepreneurship experience can surprise you!

Check it out, and let us know what you think!

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