Dear Design Doctor
I have just started my craft business, and I am working on a budget for my business plan, but I am stuck.
How do I forecast my sales?
It’s not just about financial planning, but also more practically … how can I predict how much I will have to create and then sell if I have never done it before?
The Design Doctor for this real life question is Patricia van den Akker, Director of The Design Trust.
‘That’s a great question! And indeed not that easy to answer … as forecasting is as much a science as an art, and it depends on so many variables.
Being able to forecast accurately is really important, as it will minimise wasting your money, time and energy. If you produce far more than you sell than you will get a cash flow problem where you are more likely to run out of cash. If you don’t produce enough then you will potentially lose out on sales.
I firstly will explain briefly how to forecast your sales if you are an established business, then I will explain how to forecast if you are a new creative business, and I will finish with what to do if your forecasts aren’t correct.
Forecasting sales for existing businesses
If you are an existing business with some track record of sales then it will be much easier to forecast. You can base your forecast on your previous sales of the same or similar product at a similar price level. Depending on how much marketing activities you plan to do you can increase or decrease the sales forecast against your previous records.
Don’t just look at the annual sales of a particular product, but also at any trends that you can spot.
In which week was this product particularly popular?
Was there a particular reason for it? For example was it a good gift product for Valentine’s Day and did you do a special email to your clients or online offer?
The seasonal nature of many crafts businesses (with the vast majority of sales happening in the last 10 weeks of the year) is a major issue for cash flow problems.
Use your knowledge of your market and client’s needs to get better and better at predicting your sales as well as your income – not just on an annual basis, but on a monthly basis as well.
How to forecast if you are a new creative business
Step 1: Sales = quantity x price
This might sound obvious, but it is often useful be reminded of this.
Your sales forecast is based on two different parts:
the amount of products you will (be able to) create + the price you can sell it at.
As a starting point for your sales forecast you will need to identify:
- how many products you want to create
- the price of each of these products
TIP: If you sell both to trade and consumers then you will need to identify the wholesale and retail price for each, and identify how many products you will sell to trade and how many to individual consumers.
For example your first attempt at a sales forecast will be like this:
I want to earn £22K, therefore I will need a turnover of £32K. (The difference of £10K are the business costs.)
This turnover will be achieved by creating:
80 silver rings @ RRP £95,- / £150,- = £ 11,750
50 brooches @ RRP £85,- = £ 4,250
80 silver necklaces @ RRP £125,- = £ 10,000
20 private commissions @ RRP £ 300,- = £ 6,000
This initial forecast is based mostly on:
- What you think you can create or produce in one year, based on how much time you have got to create work, how effective and efficient you are with your time and creative processes, and if you create yourself or outsource. Obviously if you are working part time then you will have less time to create work. But also note that even if you work full time you only will be able to spend around 40% of your time actually making work, as the rest of your time will be spend on marketing, admin and other business activities.
- The price level of your products, which is based on your profile and credibility, where you want to position your work and what your competitors are charging for similar type of products.
- The costs of your business including your overheads (e.g. studio, insurance, electricity etc) and raw materials.
- What you can actually sell in one year, which depends on the type of sales channels you have got (e.g. selling through retailers means a lower profit for you but they will order higher quantities), how many different sales channels you are planning to have (e.g. selling direct, online, through craft shows, wholesale, commissions, …) and what other marketing activities you will do to promote your work.
- Contingency: add around 10 – 20% contingency, which will cover unsold and damaged stock. So you will need to create much more than you will actually be able to sell, and you might have to discount products too.
As you can see … rather a few variables.
The reality of forecasting is that it is tricky, and that even when you review the actual sales versus the forecasts on a regular basis, you will need to live with some uncertainty!
Start with identifying your financial goals for the year, and clarify how many products at what price level you are aiming for. Then break this down over the year and identify how many of each you will be selling in each month. This will be a good starting point to identify your income for your cash flow forecast.
Step 2: Research
Once you have identified the strategic overview of what you think you can produce and sell in a year, it’s time to check with the outside world.
You will need to research in more detail:
- The price levels of your competitors. You can either research online, or by visiting retailers, galleries or trade shows for example.
- Financial and sales expectations. It’s really useful to talk to more established creatives about their financial expectations for craft or trade shows. You can also talk to craft fair organisers or online boutiques to find out what their average sales are, but make sure that you also get the top and bottom figures. Better to be a little pessimistic when forecasting!
- Income expectations. This is not easy info to obtain from established creative sole traders, as very few people like to share how much they earn. However, there are some income research reports, such as published by Artist Newsletter or Design Week, that can give you some indication of how much income startup creative businesses make.
After this research you can update your initial forecast with more realistic and factual information.
Step 3: What marketing and selling activities will you be doing?
Marketing is a crucial aspect in being successful in sales.
Just doing the forecast will not change anything in your business.
It is only when real sales start to happen that your forecasts turn into reality!
So look at your initial list of what you think you can create and at what price level, and then create a list of potential marketing and selling activities that you will undertake to make sales.
Unless you will spend 30% – 40% of your time on marketing your products and business with a strong focus on getting more clients and sales, you will not be able to achieve your sales forecast.
If you don’t know where to start with marketing your products then read any of our marketing & selling blog posts, and in particular how to turn a stranger into a client – the 4 stages of selling, and how to start marketing my crafts on a limited budget.
I also strongly recommend this practical marketing book by C.J. Hayden called Get Clients Now!
Note that some of these additional marketing activities might increase your business costs, so make sure that you go back to your budget and amend the business expenditure.
Step 4: Managing your forecast
I suggest that you don’t create just one financial forecast, but create three:
- a lean forecast
- a realistic forecast
- an optimistic forecast
All you need to do is go back to your forecast and instead of 1 column, add two more.
In the first column (the lean one) you look again at all your income and expenditure and be (very) pessimistic. You will probably have noted by now that forecasting your expenditure is much easier than forecasting your sales, as you can look at your previous invoices or you research potential costs such as insurance or studio space. So forecast your expenditure first, then your income.
Then you also do a forecast for all your income and expenditure again – this time as optimistic as possible.
And finally you create your most realistic forecast – somewhere in between the lean and optimistic one.
Although this might take a little bit more time, these three forecasts together will be much more useful to you, as you will get a top (the optimistic forecast) and bottom (the lean forecast) target to aim for. And due to the averages you are more likely to even out your overall forecast.
Depending on your financial situation you then need to check your forecast against reality. Ideally on a fortnightly or monthly basis.
Go through your bank statement in detail and check your actual income and expenditure against your forecast.
If your forecast is out by more than 5% (either positively or negatively) then identify all the reasons why the reality is better or worse than your forecast.
Create an action plan to improve sales if necessary through additional marketing.
To help you with your financial management The Design Trust Business Club members can watch this 1hour webinar recording with an intro to financial management for creatives.
What to do if you don’t get your forecast right?
It is crucial that you act if your forecasts are not correct. Don’t bury your head in the sand, as your financial worries won’t go away! Instead go through the facts and create an action plan.
Action 1: Create alternative income streams
Are there other ways to generate income in the short term if you have got a financial problem? Can you work part-time in another job? Can you sell some of your stock in alternative ways?
Especially craft businesses have quieter times in the year, and you need to be aware of that when you do your forecast.
It might be very beneficial for your cash flow to either save some of your income for these leaner months, or to take on other work during this period.
The Design Trust Business Club members can watch this 90min webinar recording on More than making: creating different income streams for your design or craft business.
Action 2: Create a marketing action plan
Marketing is often the key ingredient for successful creative businesses. If your financial forecast was not correct than you might have been too optimistic in the first place, and you might not have taken into account the amount of marketing required to make your business a success.
You might need to look at:
- a wider range of income streams e.g. teaching, publishing, licensing, … Our Business Club members can watch here a 90min webinar on creating alternative income streams.
- a wider range of sales channels e.g. direct, fairs, online, whole sale, commissions, …
- Focus on a niche market You can read more here about how to identify your niche.
Our ebook The Design Trust Guide to Start & Run a Successful Craft Business can help you, as well as our many marketing & selling blog posts, and our Get Clients Now! coaching programme for more individual advice and coaching.
Our Business Club members can also watch this webinar on Essential marketing for creatives
Action 3: Encourage pre-orders
You can encourage your buyers to pre-order your products before you start ordering your raw materials. Instead of guessing what your clients are going to order, you actually ask them to tell you in advance!
For example send your trade buyers a brochure or price list in the Summer for your Christmas products, and offer them 5 – 10% discount if they order and pay by 15 September, for a delivery at the end of September.
Also giftware trade show Pulse, which takes place in June in London, is a good example of an event where trade buyers can order Christmas products for delivery much later in the year.
You can do something similar with your existing individual clients or online customers by offering them a discount or bonus product if they order their Christmas products much earlier.’
Want to learn more about forecasting your sales?
If you want to learn more about forecasting your sales, creating a marketing plan and getting into action about your marketing, then join our intensive, 6-weeks online course & coaching programme Get Clients Now!
In this programme I will teach you what works to get (more) clients, and you will be working on your own marketing plan.