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5.7 Sales Projection Year 1 Questionnaire

Why does a small business like Lights On Electrical, Inc. need to forecast its sales for its first year of 2015?

The projections of sales is one of the key components of a business plan. The reason that a small business like Lights On Electrical, Inc. need to project its sales, is that the sales projection become the basis for all financial planning and projections for the business in the business plan. This section of business planning gives a business owner like Andy Powell the ability to convey his sense of what the growth of the business will be like to the reader of the business plan, who may be a banker or potential partner.

Since it is the revenues that drive the entire income and expense statement, the assumptions that a small business owner like Andy Powell makes about the sales numbers are very important. If you get these numbers wrong, all your forecasts and expectations of profitablity will be inaccurate. A clear balance has to be maintained at all time between not being too conservative and too aggressive. If we choose to forecast the first years sales in an overly aggressive manner, it could easily backfire in many ways:

  1. We may have to wind up eating a large piece of humble pie when the actual sales numbers for the first year of 2015 come in much below our aggressive forecasts.
  2. Lenders may decide to change the terms of the loans or even cancel entire lines of credit if the actual sales forecasts for the first year of 2015 come in below expectations.
  3. Partners may decide to use legal remedies if they think that the sales estimates for the first year of 2015 that have been used in our business plan by Andy Powell were misleading.

Should the sales forecast for the first year of 2015 be any different that those for 2016 or 2017?

That would depend on the changing dynamics for a business like Lights On Electrical, Inc.. Thus if Andy Powell anticipates a change in business conditions that will substantially affect the sales for either 2015, 2016, or 2017, the sales forecasts will have to adjusted accordingly. If not, then the sales forecasts should take in the same inputs in 2016 and 2017 as they did in 2015.

What are the inputs that go into projecting the sales forecast for the first year of 2015?

There are two direct inputs that make up the sales projection for the first year of 2015. The first is price per unit of product or service and the second is the sales volume in units of product or service. There are many items that can be taken into consideration for the projection of price per unit, but the most important has to do with positioning. Thus if a small business like Lights On Electrical, Inc. has chosen to position itself on the top end of the market, its owner, Andy Powell will price out the product or service accordingly.

The second aspect of a sales projection is of course the number of units of product or service sold. This number is arrived once the price per unit is set and the seasonality of the sales projection for the first year of 2015 has also been established.

What is sales seasonality and how does it affect the sales projection for the first year of 2015 in a business plan for Lights On Electrical, Inc.?

Seasonality of sales for the first year of 2015 refers to the how the sales for the year will be affected by seasonal changes in the buying patterns of a target market like Cuyahoga, Ohio. If we feel that there is no seasonality then we can assume that the sales for the entire first year of 2015 will be evenly distributed and there wont be any changes in the pattern of revenues. On the other hand if an industry like Electrical Contractor does experience seasonal fluctuations in sales where for example things are slower in the summer than during the rest of the year, then this seasonal variablity must be factored into the sales projection for the first year of 2015.

What is a slow market, good market and great market for a small business like Lights On Electrical, Inc.?

Anytime sales projections for the first year of 2015 for a small business like Lights On Electrical, Inc. are being projected, it is very important to recognize that there are three distinct sales environments that the business will possibly face in its first year of business in 2015:

  1. Good Market - this market condition is the definition of a steady and normal market where business conditions have not changed and the economic conditions for a local target market like Cuyahoga, Ohio are normal.
  2. Slow Market - a slow market conditions is characterized by a decease in the overall level of economic activity in a target market of Cuyahoga, Ohio. In a slow market environment, there is typically a slow down in the sales of all businesses and therefore an proportional slow down in the sales projection for Lights On Electrical, Inc. is also anticipated.
  3. Great Market - a great market is a market where there is very strong optimism and the level of overall economic activity is very high and there is a tremendous demand for the goods and services from an industry like Electrical Contractor.

It is important to recognize that different market conditions require that the sales projection be adjusted accordingly and having these scenarios play out in the sales projections shows that the planning and strategy of a small business owner like Andy Powell has taken into account many scenarios and not just the one with the best possible outcome.

Quick Links:

  1. Go to the Corresponding Template section for this industry.
  2. Go to the Corresponding Business Plan section for this industry.

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