Watch Out for Wishful Sales Forecasts
By Dr Paul E Adams | August 31, 2003
"Forecasters are dangerous, particularly those about the future." Samuel Goldwyn
Fantasy in business can be bad for your checkbook.
Have you ever read a business plan about a promising start up? Perhaps too promising. I recently did and nearly put some money at risk. The product description and customer identification were well thought out, the sequencing of promotional activities and the sales campaign was methodical, the proposed income statement looked creditable, and the list of executives and potential customers was impressive. At first glance — not wanting to miss out — I was ready to write a check.
But after spotting the sales projections- wow! The first year $1,750,000, the second year $6,350,000 and the third, an astounding $19,590,000. Not a bad growth rate, from zero to 20 million in three years.
Sounds exciting, does it not? Or is it a red flag?
And when I found no comments or details explaining these projections, I put my checkbook away. The red flag was at full mast, as I am familiar with entrepreneurs, who trying to attract money wave magic wands and engage in puffery. Some believe their own fantasies, and some think they are Merlin able to create miracles. In either case, unrealistic projections lead to financial wreckage.
Although the sales forecast is one of the most important calculations in any business plan, the maze of the plan s financial detail can so overshadow it that you assume it is accurate. Successful entrepreneurs know that the sales forecast is the basis of the estimated cash flow and money management. They know red ink flows from missed forecasts. And they are well aware, if their company common stock is traded; the market is unforgiving of crystal-ball error.
If you are thinking of joining or investing in a new business with a glowing business plan-you will be wise to check that rosy sales projection. Without backup data, be cautious- as sales hypes rarely reflect the truth. If you are starting a business can you justify your forecast or has fantasy colored your outlook? Perhaps your desire to succeed can be so strong that dreaming can creep into your plans without you being aware of it.
Too many would be entrepreneurs want success so bad, they refuse to listen or consider the possibility of failure. Somehow, they confuse caution and reasonable doubt with negative thinking. They are blinded by fantasy and unrealistic dreams that they believe real. If your best friend is jumping into a business and wants you as a investor- for your own peace of mind play devils advocate and question the numbers. If you are taking the plunge into business ownership-just because you think you can fill your business with customers does not make it so.
If you have ample historical sales data, reasonable forecasts are easy- even eyeballing the figures with intuition and knowledge of the market can result in a creditable projection. The problem is new products or companies with no sales history are iffy to predict. As accurate as the numbers may appear, it is still a guess. In addition, guesses are based on judgment-good and bad.
A sales forecast is just that, a forecast, an educated guess with a possibility of error. Every business, every new product or project has a break-even point- a minimum sales volume necessary to generate enough income to cover your expense. If the forecast is above your break-even, great- you have a margin of safety. If not- you may be headed for trouble- with no room for error. Before you offer your time or money, compare the sales forecast to that all-important break-even sales or income level. It will give you a yardstick of risk.
You may be comfortable with statistics or any of the number crunching methods of sales forecasting, but be uncomfortable with sales guess that are too optimistic. If you want to avoid heartache and money worries- always question sales projections and never assume they are accurate.
Remember, the calculations of the business plan- expenses, profit margins, cash flow, are based on someone s crystal ball talents. If you are looking at a to good to be true forecast, ask about the marvelous marketing strategy that is going to create the miracle. In addition, if you can not find comments or descriptions substantiating it- save your money and label it fantasy!