Use of Sales Projections
Factors/Terms
Associated with
Making Sales Projections
1. Sales Ratio
5. Sales Quota
2. Sales Forecast
6. Product Positioning
3. Break-Even point
7. Market Share
4. Economic
Outlook
1. Sales Ratio
•An expression of any component of the income
statement as a percentage of total sales.
•The value of the component is divided by the value of
sales.
•Example:
Rent expenses . . . . . . . . . . . . . . $500
divided by sales . . . . . . . . . . $10,000
equals sales ratio of . . . . . . . . . . . .5%
Current Ratio
• A comparison of current assets with current liabilities.
This is one indicator of the ability of the business to pay
its debts.
• Assets divided by liabilities
• Ratio of 2:1 is usually considered sufficient. (Value of 2.0 or
higher)
• Example:
Assets of
70,000
divided by liabilities of
$35,000
equals a current ratio of
2:1
(which means $2 in assets for every $1 in liabilities)
Math: 70,000/35000 = 2 (second number is always 1) = 2:1
2. Sales Forecast
• An estimate of sales for a specified period.
• Current sales plus (% increase times the current sales)
OR
• Current sales times (100% plus % increase)
• Example
Current sales . . . . . . . . . . . . . . . . . . . $5,000
projected increase of . . . . . . . . . . . . . . . . .7%
yields a new sales forecast of . . . . . . $5,350.
Math:
5000 x .07 = 350
5000 + 350 = 5350
3. Break-Even Point (BEP)
• The point at which the money from product sales
equals the costs of making and distributing the
product and you can begin making a profit.
• Once you reach the break-even point, you will neither
make nor lose money. When sales can exceed the
break even point, you will begin to make a profit.
•
BEP=Total fixed expenses divided by (unit sale price
minus unit variable expense)
3. Break-Even Point (BEP)
Break-Even Point Formula
Total fixed expenses divided by (unit sale price
minus unit variable expense)
Example: If you have:
fixed costs . . . . . . . . . . . . . . . . . . . . . . .$4 per unit
variable costs . . . . . . . . . . . . . . . . . . . . $2 per unit
expect to provide . . . . . . . . . . . . . . . . . 4,000 units
at a selling price of . . . . . . . . . . . . . . . $12 per unit
Compute the break-even point.
$4 (fixed cost per unit) x 4,000 units = $16,000 total fixed costs
$16,000 (total fixed costs) / ($12 (selling price) - $2 variable costs)
= $1,600 units as break-even point.
4. Economic Outlook:
• Trends associated with the economy that can
impact a business's sales
• Example: Lower airline fares equals
increased travel and tourism.
5. Sales Quota:
• A goal assigned to a sales person for a
specified period.
• The strength or weakness of your sales
operation is indicated if these goals are met.
• Providing a sales staff with a goal can be a
measure of his/her effectiveness.
6. Product Positioning
• Placing a product in a certain market to get a
desired customer response.
• Example:
 Putting umbrellas at the front of the store on a rainy
day.
 Placing gum at a checkout counter
7. Market Share
•The percentage of a product/service that is sold
in the total market for that product/service.
•To be able to succeed in the business world, you
must be able to capture market share from other
competitors.
Financial Tools
That Utilize Sales Projections
•Cash Flow Statement
•Repayment Plan
•Inventory
Inventory
Cash Flow
Statement
Repayment Plan
Cash Flow Statement
• A financial statement that shows the flow of
money in and out of the business.
• The sales projection provides the income
factor to determine how much money you may
have coming in to the business.
Repayment Plan
•A plan or statement showing how and when
the debt of a business will be paid.
•The plan is often a document prepared by
the business owner and the lender.
Calculating Repayment
In order to calculate repayment, you must
know at least two of three things. You
need to know:
•The amount of the entire loan
•Your payment amount
•How long you have the loan for.
For an example: Bob takes out a $100,000 loan.
His payments are $1000 per month. How long
will it take him to pay it off?
Math: 100,000/1000= 100 payments (divide by 12)
8.3 years or 8 years and 4 months.
Inventory
•Ensuring that adequate inventory is on hand to
meet sales demand.
•Sales projections help to determine the amount of
inventory to have on hand to meet these
projections.
•Having too much or too little inventory can be a
problem for a business.