Module 4 • Financial feasibility study


It is preferable to forecast at least six months ahead since some months yield better sales than others. This also helps a business to calculate cash flow requirements. The sales forecast is a huge challenge for everyone in business. Even those businesses which have been around for years struggle


DEFINITION


Sales forecasting A sales forecast is a prediction of how many products (or services) a business will sell over a particular period of time expressed in “units” or “Rands”.


with this prediction since it is about what will happen in the future over which we don’t have complete control. However, there are a number of key questions to be asked to assist a business in making its sales forecast as realistic as possible.


Key questions • How big is the potential market? (market size) • How many people are likely to buy my product or service? (market research) • How many, and what type of products do my competitors sell and at what price? (competitor analysis)


• How many do I need to sell to make neither a profit nor a loss? (break-even point) The answer will quickly tell you what your minimum sales need to be.


The importance of the sales forecasts


If you know what your sales figure will be, then calculating your variable costs is quite easy. It will help you tremendously to determine whether your business will be profitable or not. An accurate sales forecast will also help you with the ordering of stock. Not having enough stock is as bad as having too much stock!


1 Out of stock means • loss of sales income. • unhappy customers.


2 Too much stock means • more cash needed. • higher risk (can be stolen). • extra space needed.


Examples


Simon calculated earlier that his potential sales turnover is R9600. The average selling price for cold drinks is R7, but he believes that students will be prepared to pay R8 for the convenience of being able to buy cold drinks on campus. Therefore his potential sales per month are R9 600 ÷ R8 = 1200 cold drinks.


DID YOU KNOW


Existing businesses often use their previous year’s sales figures as a starting point for forecasting.


DID YOU KNOW


The following will change if your forecast changes: • Break-even point • Net profit • Sales


From experience Simon knows that he is likely to sell less in the cold winter months whereas summer time means thirsty students! He expects to sell even more during the season. The other factors he considered are that it will take time until all the students know about his vending machine and that sales will be low during the summer vacation period. His sales will therefore be slow in the beginning and in December/January.


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