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How To Investigate Any Business Opportunity
Forecasting Sales
The most important projection to be determined in the projected income statement is the sales figure.
After this number has been established, the cost, expense, and profit figures are easier to acquire. The
data for projecting sales will come from past sales records of the business. The more accurate and sys-
tematic these records are, the more confidently they can be used in estimating future sales.
How long a forecast? A basic question is this: "Over how long a period of time is it necessary or possi-
ble to forecast sales?" Any forecast is uncertain, and the farther a forecast is projected into the future,
the greater the uncertainty. While it may be possible to exercise at least reasonable control over the in-
ternal operation, the external economic and market factors make forecasting difficult because of lack of
control.
Perhaps the best way to approach the length of the forecast is in terms of the expected return on invest-
ment. Suppose it is estimated that the business should bring a 20 percent return on initial investment.
The investment, then, should be returned in 5 years. At this point, the owner would just break even on
his original investment. It seems logical to project sales and profits over a span of time comparable to
that estimated for return on investment - in the above illustration, 5 years.
Any such forecast, however, should give careful consideration to expected changes either in the econ-
omy or in the industry market that might affect the pattern of sales change. Mathematically, it is possible
to forecast sales with some precision. Realistically, however, this precision is dulled because vital mar-
ket and economic factors cannot be controlled.
Methods of forecasting sales. There are numerous methods by which sales forecasts can be made.
Most of them take their lead from the past sales performance of the company. For establishing trends or
averages, 5 years of sales history is better than 3, and 10 is better than 5.
Perhaps the simplest method is to assume that the percentage increase (or decrease) in sales will con-
tinue and that no market factors will influence sales performance more in the future than in the past.
Suppose, for example, that the rate of yearly average increase for the past 5 years has been 4 percent,
and that each year has shown about this rate of increase.
Then it might be assumed that sales for the next year will be 4 percent greater than the current or most
recent year.
But what about the year following? The year after that? Can it be assumed that these years will also in-
crease at about 4-percent level? Each additional year into the future reduces the certainty of the predic-
tions.
If these negative influences limit the accuracy to such an extent, why try to forecast beyond the immedi-
ate future (1 year)? Because such a forecast forces the person making it to give at least a little attention
to economic and market factors that might influence the future operation - that might, in fact, indicate