How to create a sales forecast for your business
Get to grips with forecasting your cash flow and sales
Developing your sales forecast isn’t as hard as most people think. Think of your sales forecast as an educated guess.
Forecasting takes good working knowledge of your business, which is much more important than advanced degrees or complex mathematics. It is much more art than science.
Whether you have business training or not, don’t think you aren’t qualified to forecast. If you can run a business, then you can forecast its sales. Most people can guess their own business’ sales better than any expert device, statistical analysis, or mathematical routine. Experience counts more than any other factor.
Break your sales down into manageable parts, and then forecast the parts. Guess your sales by line of sales, month by month, then add up the sales lines and add up the months.
For aspiring entrepreneurs, a sales forecast will help you work out how much more money you’ll need to before you start your business.
A well-thought-out sales forecast, combined with a detailed sales plan, should allow you spend more time growing your start-up rather than responding to day-to-day developments in sales and marketing.
However, always remember to expect the unexpected. There’s always a chance something drastic could happen and ruin your projections.
A key part of your business plan, you’ll present your sales forecast to from potential clients to key investors.
1. Use text to explain your forecast and provide related plans and background
Although charts and tables are great, you still need to explain them. A complete business plan should normally include some detailed text discussion of your sales forecast, sales strategy, sales programs, and related information. Ideally, you should use text, tables, and charts in your plan to provide some visual variety and ease of use. Put the tables and charts near the text covering the related topics.
2. Describe your sales strategy
Somewhere near the sales forecast you should describe your sales strategy. Sales strategies deal with how and when to close sales prospects, how to compensate sales people, how to optimise order processing and database management, how to manoeuvre price, delivery, and conditions.
How do you sell? Do you sell through retail, wholesale, discount, mail order, phone order? Do you maintain a sales force? How are sales people trained, and how are they compensated? Don’t confuse sales strategy with your marketing strategy, which goes elsewhere. Sales should close the deals that marketing opens.
To help differentiate between marketing strategy and sales strategy, think of marketing as the broader effort of generating sales leads on a large scale, and sales as the efforts to bring those sales leads into the system as individual sales transactions. Marketing might affect image and awareness and propensity to buy, while sales involves getting the order.
3. Forecast details
Your business plan text should summarise and highlight the numbers you have entered in the Sales Forecast table. Make sure you discuss important assumptions in enough detail, and that you explain the background sufficiently. Try to anticipate the questions your readers will ask. Include whatever information you think will be relevant, that your readers will need.
As a new business, you want have any previous sales figures on which to make your predictions on.
However, rather than just taking an outright guess, make an assumption based on other information. This can include:
- Market research
- Talking to vendors or wholesalers
- Studying trade magazines
- How similar products preform
- How rival businesses preform
- Whether your product is seasonal or not
If you’re a small business and have been running for over a year, use last year’s sales figures to help with this year’s projections and consider the following:
- How many new customers do I gain each year?
- How many customers do I lose each year?
- What is the average level of sales I make to each customer?
- Are there particular months where I gain or lose more customers than usual?
4. Make sales assumptions
As your business starts to grow, you need to consider any changes in circumstance that might affect your sales in a significant way. These factors – known as the sales forecast assumptions – form the basis of your forecast.
You should always seek to a figure against the change if possible. Doing so will help you get a feel for the impact it will have on your start-up.
Also, give the reasoning behind each figure, so that other people (co-workers, family members, investors) can give their view on whether they think it’s realistic or not.
Examples of sales assumptions include:
- Your market share will shrink by 2%, due to the success of a competitor.
- You will hire two new sales people halfway through the year.
- You will spend 20% less on advertising after Christmas, thus affecting sales.
Overcoming barriers to sale
- You have booked a permanent spot in a market from April, which will see you exposed to 45% more customers.
- You are raising prices by 10%, which will reduce the volume of products sold by 5% but result in a 4.5% increase in overall revenue
- You are launching a range of new products. Sales will be initially slow, but will increase next year.
You have new products that have the potential to increase sales rapidly.If you can be helpful in many instances to create two sales forecasts. One which is your best realistic assumption, and another ‘worst case scenario’ – just so you know how much cash reserve you’ll need if things really go downhill.
5. Work out your sales programme
Details are critical to implementation. Use this topic to list the specific information related to sales programs in your milestones table, with the specific persons responsible, deadlines, and budgets. How is this strategy to be implemented? Do you have concrete and specific plans? How will implementation be measured?
Business plans are about results, and generating results depends in part on how specific you are in the plan. For anything related to sales that is supposed to happen, include it here and list the person responsible, dates required, and budgets. All of that will make your business plan more real.
6. Forecast for three years
A business plan should normally project sales by month for the next 12 months, and annual sales for the following three years. This doesn’t mean businesses shouldn’t plan for a longer term than just three years but it does mean that the detail of monthly forecasts doesn’t pay off beyond a year, except in special cases. It also means that the detail in the yearly forecasts probably doesn’t make sense beyond three years.
It does mean, of course, that you still plan your business for five, 10, and even 15-year time frames; just don’t do it within the detailed context of business plan financials.