Why forecast?
Forecasts help anticipate what resources your new venture will need. Ideally, money would be spent only on inventories, manufacturing capacity and new hires, if they are needed to support sales. Matching budgeted resources to the volume of an organization requires forecasting.
From Sales to Expenses
Sales forecasts can be used to estimate a new venture’s expenses. Ideally, sales forecasts should be based on how effective marketing activities have proven to be in the past. Sales estimates should also be capped by target market potential.
Once sales forecasts have been made, they can be used to estimate costs according to cost behavior. Variable costs increase in proportion to sales and fixed costs remain the same independent of sales volumes. These relationships can be used to estimate total cost based on a sales forecast.
Working Backwards
Cost behaviors can also be used to explore the possibilities of a business model. In particular, cost behaviors can be used to develop the idea of a contribution margin, which can then be used to calculate the break-even point of the venture and total profit for hypothetical levels of sales.
