The sales forecast is the backbone of your business plan. People measure a business and its growth by sales, and your sales forecast sets the standard for expenses, profits and growth. Usually, sales forecasts are based on past sales data, industry-wide comparisons, and current economic trends. It is easier to come up with a sales forecast if you have a good amount of data in hand. However, newly established or startup companies don’t have a substantial amount of historical data and are forced to depend on market research and competitive intelligence to derive their forecasts.
Sales forecasting is not just about predicting sales numbers, it’s about having the necessary information that enables you to make the right decisions today that will help you in the future. For instance:
- Sales forecasting allows you to spot potential issues and gives you time to avoid or alleviate them. For instance, midway through the quarter, you notice that your sales team is not hitting their targets. You dig deep and find out that there aren’t enough leads being generated for the sales team to convert. Shift your focus on to the marketing department and let them know that they’ll have to ramp up their operations and improve their lead generation strategy to bring in more leads.
- Sales forecasts can help with hiring and resource/inventory management decisions. Assume that your sales forecast predicts an uptick in demand. To meet that demand, you’ll need to allocate a budget and divert your effort towards hiring and getting resources. And on the other hand, if it is predicted that there will be a decline in sales, it is time to put a pause on hiring and resource plans and shift your focus into bringing in more business.
- Remember the saying, What gets measured gets done; having a forecast lets you know what your goals are and keeps you focused. It gives you the necessary information you need to make decisions that will improve your results.
When it comes to forecasting sales, don’t fall for the trap that says forecasting takes training, mathematics or advanced degrees. Forecasting is mainly educated guessing. So don’t expect to get it perfect; just make it reasonable. There’s no business owner who isn’t qualified to forecast sales — you don’t need a business degree or accountant’s certification. What you need is common sense, research of the factors, and motivation to make an educated guess. Here are some factors that influence sales forecasting:
- Economy Conditions: It goes without saying that the condition of the economy has an impact on every business and market. If there is a depression in the economy, people/businesses will lose money and they’ll be more reluctant to purchase, and when the economy is strong, people are most likely to invest and buy.
- Policy Changes: Changes in policies or the introduction of new laws/regulations can either help or hurt your business. So, when forecasting your sales for the next period, it is vital that you take these into account.
- Industry Changes: Every industry has similar products made by different organizations. Factors such as new tech improvements, design, competitors running promotional campaigns, or new businesses entering the ring can change and affect the market share of the industry – which in turn will factor into your sales forecasts.
- Product Changes: Changes in your product can heavily influence your sales forecast. These changes may be rolling out a new feature due to high demand or removing a useless feature or removing bugs. Salespeople can leverage these product changes to shorten the sales cycle.
Your sales forecast in a business plan should show sales by month for the next 12 months, at least, and then by year for the following two to five years. Three years, total, is generally enough for most business plans. If you have more than one line of product/service sales, show each line separately and add them up. If you have more than 10 or so lines of sales, summarize them and consolidate. Remember, this is business planning, not accounting, so it has to be reasonable, but it doesn’t need too much detail. Here are some tips to get you started using a unit sales model:
- Develop a unit sales projection. Where you can, start by forecasting unit sales per month. Not all businesses sell by units, but most do, and it’s easier to forecast by breaking things down into their component parts. Product-oriented businesses obviously sell in units, but so do a lot of service businesses. For example, accountants and attorneys sell hours, taxis sell rides, and restaurants sell meals.
- Use past data if you have it. Whenever you have past sales data, your best forecasting aid is the most recent past. There are some statistical analysis techniques that take past data and project it forward into the future. You can get just about the same results by projecting the two most recent years of sales by month on a line chart and then visually tracking it forward along the same line. Statistical tools are a nice addition, but they’re rarely as valuable in a business plan as human common sense, particularly if it’s guided by analysis.
- Use factors for a new product. Having a new product is no excuse for not having a sales forecast. Of course you don’t know what’s going to happen, but that’s no excuse for not drafting a sales projection. Nobody who plans a new product knows the future–you simply make educated guesses. So break it down by finding important decision factors or components of sales. If you have a completely new product with no history, find an existing product to use as a guide. For example, if you have the next great computer game, base your forecast on sales of a similar computer game. If you have a new auto accessory, look at sales of other auto accessories. Analysts projected sales of fax machines before they were released to the market by looking at typewriters and copiers.
- Break the purchase down into factors. For example, you can forecast sales in a restaurant by looking at a reasonable number of tables occupied at different hours of the day and then multiplying the percent of tables occupied by the average estimated revenue per table. Some people project sales in certain kinds of retail businesses by investigating the average sales per square foot in similar businesses.
- The next step is pricing. You’ve projected unit sales monthly for 12 months and then annually, so you must also project your prices. Think of this as a simple spreadsheet that adds the units of different sales items in one section, then sets the estimated prices in a second section. A third section then multiplies units times price to calculate sales. The math is simple–the hard part is making that estimated guess of unit sales. A fourth section of your projected prices will set the average costs per unit. You want to set costs because a lot of financial analysis focuses on gross margin, which is sales less cost of sales. For financial reasons, cost of sales, also known as costs of goods sold and direct costs, are different from the other expenses that come out of profits. The cost of sales isn’t what you pay salespeople or for advertising. It’s the amount you pay to buy what you sell. This is usually easy to understand. In any retail store, for example, the cost of goods sold is what the store pays for the products it sells. In service businesses, the costs of sales can be less obvious, but it can still be figured out. Finally, in a fifth and final section, you multiply unit sales times average cost per unit to calculate your cost of sales. This gives you a sales forecast that you can use for the rest of your financial projections. The first place you’ll use it is at the beginning of your profit and loss statement, which normally starts with sales and cost of sales.
Of course, not all businesses fit easily into the units sales model. Some business plans will have sales forecasts that project dollar sales only, by line of sales, and then direct costs, by other factors. For example, a taxi business might simply estimate total fares as its sales forecast and gasoline, maintenance and other items as its cost of sales. A graphic artist might stick with the simple dollar-value sales forecast and project cost of sales as photocopies, color proofs, etc. In the end, it’s always your plan, so you have to make the decisions that are best for you. With a thoughtful sales forecast, you can be ready for the future.
Copyright ©John Trenary 2021