In the early stages of projects, it can be difficult to create a sales and revenue forecast for startups because there is no basis for it. However, there are a few methods that can be used to create the basis which gives you a general understanding of what to expect. These methods will be described further. In the beginning, we need to understand, what is revenue.
Definition of revenue
Revenue is the total amount of money a company brings in over a certain period.
Revenue = Price per unit * volume of sales
Revenue is calculated by multiplying sales volumes by the connected prices of services or products.
To calculate total revenue, you need to summarize the revenue for each product.
Total revenue = Price per unit of product 1 * volume of sales of product 1 + Price per unit of product 2 * volume of sales of product 2 + Price per unit of product 3 * volume of sales of product 3 …
Other wording:
Total revenue = Revenue of product 1 + Revenue of product 2 + Revenue of product 3 …
Initial data for sales and revenue forecast for startups
As you can see, for revenue forecast, it is necessary to know:
- list of products or services that you plan to sell;
- prices of each product or service;
- quantity of sales for each product or service on a monthly, quarterly, or annual basis.
The first step should be easy for each business owner, as you know what you plan to sell. Just write down the list of these products or services.
During the second step, selling prices can be determined by:
- comparison of prices of your main competitors or;
- setting prices at which you can sell products or services or;
- having the production cost or purchasing price of products or services, add a markup to them to receive selling prices.
Write down selling prices near the name of each product or service.
The most complicated is the third step: a determination of the sales volume for each product. That is why, several methods of a sales forecast for startups will be described below.
Methods of sales forecast for startups if the company has no sales yet
1. Find sales data of similar companies for the sales forecast for startups
One method is to look at similar companies’ sales volume. This can give you a good idea of the potential volume of sales for your startup. This information can be available:
– On the company’s site;
– In pitch decks;
– In the company’s presentations;
– In the company’s owner interviews in mass media.
You can find here the number of customers, the number of products/services sold, or revenue in monetary terms.
Knowing the number of customers, the average price of the product/service, and the average amount of consumption of the product for the period, you can easily calculate the revenue.
Revenue = Price* Number of units sold = Price * Quantity of customers* Average quantity of product consumed per customer
2. Set the goal for the sales forecast
Another method is to look at your goals. How many products/services do you plan to sell?
Follow the steps below for a revenue forecast:
2.1 Set a goal of a desired volume of sales.
2.2 Assess if you have enough resources (time, money, raw materials, staff, etc.) to produce the quantity mentioned in clause 2.1.
2.3 Assess if the volume of sales mentioned in clause 2.1. is realistic for your company.
2.4 If the actual volume of sales is lower than the desired volume from clause 2.1, write an action plan to achieve the goal.
3. Check the most limited resources of your company for maximum sales volume estimation
Finally, you can use limited resources estimation for revenue forecast.
It can be:
- time ( Ex.: Limited lead time set by the customer)
- money (Ex.: Limited money amount for along goods for resale)
- labor ( Ex.: Limited working hours of employees for production of goods or services provision)
- tools ( Ex.: Limited quantity of equipment or tools for the production of goods)
- land (Ex.: Limited area of land for growing crops)
- raw material ( Ex.: Limited raw materials received for goods production)
others.
Follow the steps below for a revenue forecast:
3.1 Choose the most limited resource in your company, which limits the volume of production of your goods/services.
3.2 Calculate the maximum volume of production of your goods/services using the limits of the resource mentioned in paragraph 1.
3.3 Estimate what part of the quantity from paragraph 2 can be a realistic sale volume (Ex.: 50% or 80%)
3.4 Calculate realistic sale volume by multiplying the quantity from paragraph 2 by percentage from the paragraph 3.
Let’s consider an example sales and revenue forecast for startups.
Methods of sales and revenue forecast for startups based on historical sales data
Forecasting sales and revenue is essential for startups to plan effectively and make informed business decisions. Here are practical methods that startups can use based on different sources of data and analytical approaches:
1. Sales Forecast for Startups Based on Previous Periods with Monthly Growth Rate
This method involves using historical sales data from previous periods and applying a monthly growth rate to forecast future sales. Here’s how to implement this approach:
- Data Collection: Gather historical sales data for each month over a defined period (e.g., previous year).
- Calculate Monthly Growth Rate: Determine the average monthly growth rate by dividing the difference between sales in consecutive months by the sales in the earlier month.
- Forecast Future Sales: Apply the monthly growth rate to project sales for upcoming months. For example, if the average monthly growth rate is 10%, you can forecast sales by multiplying the last month’s sales figure by 1.10 for the next month and continue this for subsequent months.
Simplified Example of Calculation:
- January Sales: $10,000
- February Sales: $12,000
- Monthly Growth Rate = (12,000 – 10,000) / 10,000 = 0.20 or 20%
- Forecasted March Sales = $12,000 * 1.20 = $14,400
2. Sales Forecast for Startups Based on Marketing Campaigns and Leads Received
This method focuses on linking sales forecasts directly to marketing efforts and lead generation. Here’s how to use this approach effectively:
- Define Conversion Rates: Analyze historical data to determine conversion rates (e.g., leads to sales) for different marketing campaigns or lead sources.
- Estimate Lead Generation: Forecast the number of leads expected to be generated from upcoming marketing campaigns or activities.
- Apply Conversion Rates: Multiply the estimated number of leads by the historical conversion rates to predict the number of expected sales generated from the marketing efforts.
Simplified Example of Calculation:
- Estimated Leads from Marketing Campaign: 500
- Historical Conversion Rate: 20%
- Forecasted Sales = 500 * 0.20 = 100
Detailed example of sales and revenue forecast for startups
Initial data for a revenue forecast:
- Your company is engaged in tailoring and selling designer dresses.
- You sell 5 models of dresses and you have purchased fabrics and other materials for 20 dresses of each model.
- The price of one dress is $100.
- At the same time, 250 pieces of dresses can be stored in your warehouse.
- You have 2 seamstresses. Their working hours are 8 hours per day, which is an average of 160 hours per month.
- It takes 6 hours of work for one seamstress to cut and sew one dress.
- realistic revenue = 50% of the maximum possible revenue ( assumption for this case).
Task:
- Calculate the maximum possible revenue of the company per month, taking into account limited resources;
- And projected revenue.
Calculation of sales and revenue forecast for startups:
You have three types of limited resources in your company:
– raw materials available ( fabrics and other materials);
– staff time;
– a storage place for dresses.
Let’s calculate the volume of production with each of them and estimate the most limited resource:
– raw materials available: 20 dresses * 5 models = 100 units
– staff time: 160 hours *2 employees/6 hours= 53 Units
– storage place for dresses: 250 units
You can see in the calculation above that the most limited resource in this example is staff time.
So, maximum possible revenue per month = maximum possible production of dresses = 53 units * $100 = $5300
Realistic revenue = 50%* maximum possible revenue = 50%*$5300 = $2650
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FAQ: sales and revenue forecast for startups
About Author
Kateryna Moskovenko
Financial Consultant with 12 years experience in accounting, management accounting, and financial modeling; Founder of Fiscra; Author of courses and training in financial modeling, business planning, and entrepreneurship; prepared more than 50 financial models for startups.
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