As soon as we start talking numbers, eyes glaze over and folks exclaim, “I hate number”. Wait, you are not alone. I am not a fan of this either but by making this as simple and understandable as possible we can see its usefulness.
Developing a narrative sales forecast asks you to explain and describe how you will be making money by stating the products and services you will be selling. These should match, in Section 1 “The nature of the business, products and services”. You should not be introducing a new product here that you haven’t already described as part of you business. If you are, go back to Section 1 and add it into the products and services description.
It is recommended that you track and predict sales in more than one category. For example if you sell at farmers markets, break out sales per location. If you sell more than one thing, group them into categories, like fresh produce, preserves and seeds/flowers. If you can’t decide try to group sales together that have similar profit capabilities or similar costa to produce.
Consider having multiple revenue streams. Why sell just one thing when you have a captive audience who is already buying from you. Selling more than one item or service makes sense when each one targets the same customer or items and services maybe complementary to each other or as an add on. An example of this is in hair salons. In addition to providing haircuts, they sell the products their customer see and experience like shampoos and gels. In a spa that sells the products they use in treatments. Other examples include yoga studio selling mats, dance studio selling shoes and dance supplies. Selling brands not found in a store and unique to you can allow you to mark up and not compete with big box store pricing who don’t carry specialty items. A restaurant selling its salad dressing or bbq sauce is a great add on. Even though it’s a small sale it helps increase the average sale , helps level out sales that may be slow in one area and is an opportunity for branding that allows the customer to think of the restaurant long after their lunch or dinner.
Forecasting sales is a guessing game but you have to start somewhere to predict and what the 1 or 2 years ahead may look like. Forecasting sales is done for several reasons, to see what level of sales you need to cover your expenses, to help plan for seasonal variations, including staffing levels, determine number of hours you need to operate to generate adequate sales.
If you are new to business and have no business history you have to make assumptions. Start by looking at a typical customer, what they would spend on average and multiply this by the number of customers you expect in a month. You can also do high, mid and low range predictions on both pricing and customer count. This process can help you to see your ability to cover your costs when sales are lower than expected and conversely how to plan for profit when sales are higher than planned.
If you are seasonal, you may want to plot the high sales months and average them out in the cash flow which may not have the capability to reflect monthly variations but will ask for a yearly average instead.
The narrative sales forecast can also calculate, based on the number of hours you will work each day, the number of days per week, and the number of weeks per year to make sales. Remember you will take holidays and there may be other planned closings so factor these in.
We do this because you will also be completing a cash flow forecast.
Every decision you make should be completed 2 ways, so that it can be verified and potential errors found. Completing sales assumptions in a narrative format does that.
This is a way for the business owner to talk through or narrate the assumptions they will make to complete a cash flow.
It is important to see if the numbers make sense. Also to explain to a reader, banker or investor the assumptions are being made and the rationale supporting them. Remember, people reading your plan will not be familiar with your business and the factors that affect it.