162 CHAPTER 8 GETTING TO GROSS PROFIT
Forecasting sales volumes
What affects demand for your products? You have already thought about this in great
detail while reading earlier chapters. The list on page 164 brings together ten factors, split
conveniently into two groups.
The first four or five influences reflect mainly your operating environment.
The other items reflect the way that demand is affected by things such as culture,
perceptions, needs, styles, fashions and fads.
Demand for a product class belongs in both camps. Perhaps there are plenty of other grey
areas. But the point here is that you can make an economic or environmental forecast
that relates to areas outside of your control. And then you can paste on top an industry
forecast that reflects the way that demand can be managed. The industry forecast will
indicate sales of a product class or category and – this is where you are heading – sales of
your product.
Volume and values
By and large, you make better sales forecasts when you work in volume terms (the
number of items that you sell), and then multiply by the price per item to arrive at
sales value. This allows you to separate out the effects of changes in price and the
underlying changes in demand.
t
One potential mistake to avoid is forecasting sales on a wish. Venture capital
providers in particular shy away from statements such as ‘the total market
should be worth $10 billion in 2005 and it is not unreasonable to assume that
we will win 1% of this …’. You might get away with this proportional forecasting if you
have a clear track record, can use historical ratios as evidence, and can demonstrate
the likely results of your marketing strategy. Otherwise, resist the temptation.
t
FORECASTING SALES VOLUMES 163
The fast track to gross profit
1 Forecast economic trends in general (you can borrow a free forecast from
many sources).
2 Forecast the way that economic trends will affect your product class (such as
travel) or category (air travel) – see Intimate relationships/leading indicators
(page 167).
3 Examine the way that demand for a product class and category is changing.
4 Examine the way that your strategy and plans will affect demand for your
product.
5 Put together steps 1 to 4 to forecast your sales volumes and values.
6 Work out your cost of sales.
7 Calculate gross profit (sales less costs).
The world economy
Gross profit
Sales volume x Price = Gross sales
Less
Production or purchase volume
x Production or purchase costs per unit
= Cost of sales
Equals
Gross profit
Check trends and pressure here…
to forecast these … and get to this
Your business
Your market
Your industry
164 CHAPTER 8 GETTING TO GROSS PROFIT
TRENDS, CYCLES AND SEASONS
Recall that around the long-term trend (up, down or flat), there usually is a cycle (reces-
sion, depression, recovery, boom). Superimposed on this there is frequently a seasonal
pattern. Are you in a seasonal business? Does demand increase at certain times of the
year and fall off at others? Almost every business experiences some seasonal variation,
even if it is only slight, perhaps caused by vacations or religious festivals. The effects of
seasons, cycles and trends is illustrated in Figure 8.1. When you have a long run of sales
figures, identifying seasonal variation is one of the easiest and most useful activities that
you can undertake. The mechanics are outlined below. A clear understanding of seasonal-
ity will help you to manage your operations during the year.
Ten inuences on sales volumes
(Using travel as an example)
1 Fundamental trends – long-term economic growth that has enabled mass
travel, baby booms that have produced a generation of thirty-somethings
eager to travel.
2 Economic cycles – medium-term fluctuation around the long-term trend (see
pages 91–92 and below) where, for example, recession dampens spending on
luxuries such as travel.
3 Meddling governments – short-term changes in policies, incentives, etc.;
higher personal taxes might reduce disposable incomes available for travel.
4 Seasonal variation – summer holiday travel, travel for religious festivals.
5 Demand for a product class – travel in this example.
6 Demand for a product category – e.g. air travel.
7 Demand for your product – your specific air services.
8 Demand for competing products – a competing airline.
9 Demand for substitute products – rail and sea.
10 Demand for other unrelated products – which eats up disposable income
and changes the amount available for spending on travel.
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