How do you estimate sales in a small business?

Estimating sales is one key way to figure out how well your business idea might work as an actual business. The stronger your sales forecast is, the more confident you can be in going ahead with your small business idea. Estimating sales lets you organize market and financial data in a way that helps you figure out what your profit might be – the money that’s left over after all your expenses have been paid. We don’t need to tell you that profit is important! No profit, no paycheque for you. That’s no way to live.

At GoForth Institute, we want small business owners to live comfortably right out of the gate. However, that takes planning. And lots of it! So let’s look at one of the most important types of  planning you can do as a new entrepreneur — the sales forecast.

There are three methods for creating a sales forecast: i) Market share method; ii) Daily capacity method and iii) Market testing.

Market share method to estimate sales

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.

Daily capacity method to estimate sales

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:

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.

Market testing to estimate sales

Market testing is another way to estimate sales in your small business. Here are the steps involved:

1. Develop a prototype, model or description of the product or service that you can show to others. Most ideas for new products or services don’t work the first time. With a model or prototype, you can photograph it or create a picture of some kind and demonstrate it to a prospective buyer. It also allows you to try it out for yourself to make sure it works. (Be sure to keep accurate notes of your research; you may come up with an even better idea later.)
2. Seek out potential customers with your sample or prototype and ask if they would buy it, how often and how much of the product or service they’d buy. Be sure to call on the individual who makes buying decisions. Then ask them how much they’d pay for this product. If people criticize your new product idea, ask them why. Ask how the product could be modified to make it more attractive.

The only real test of a product or service idea is a live market test. Listen carefully to comments and objections of the buyer – their feedback is priceless. Most importantly, listen for their interest to purchase and comments on what they’d pay. From there you have the beginning of your sales forecast.

Good luck!