Forecasting sales

Predicting your sales can be difficult, but an accurate sales forecast serves many important purposes as a management tool. Be realistic when projecting sales and be prepared to explain the reasoning behind your forecasts.

Existing business

If your business is established, you can base your sales forecasts on previous sales records. Use these figures to estimate your likely sales for the year ahead and break this down into monthly or weekly figures as required. Some guidelines:

  • Forecast the number of units (items made or sold, or hours charged) you expect to sell during the coming year for each product or service category group.
  • Allow for current market conditions, seasonality or fluctuating sales trends, and expected business growth.
  • Identify any internal factors that might affect sales next year in each category such as staffing changes, profit expectations, promotional plans or capacity constraints.
  • Do the same for any external factors such as inflation, competition and business trends.
  • Talk to your customers about their expectations. Will they continue to buy from you? Are they looking for something different? Can you supply it? In short, stay close to your customers.

New business

If you’re new to business and have no past trading record, you’ll have to take extra care in estimating sales because you don’t have historical records to refer to. Base your sales forecast on the work you’ve done to validate market demand:

  • Solid market research.
  • Test marketing on a limited scale.
  • Sales already made or contracts secured.

Other factors to consider include:

  • Your marketing plans and any new products in the pipeline.
  • The total size of the market.
  • What sales competitors are achieving.
  • The impact of potential new competitors.

It’s also worthwhile interviewing potential customers and talking to suppliers and industry experts.

Sales constraints
Double check your forecast figures in relation to these potential issues:

  • Do you have the stock, staff and resources to achieve your projections?
  • Can your suppliers meet demand?
  • Have you considered seasonality?

What other constraints might affect your predictions?

Why the sales forecast is important

You need a sales forecast because sales provide the income for the business. Without sales, you have no business. A forecast enables you to set sales targets, budget effectively and complete a cash flow forecast.

An accurate forecast gives you the hard facts to make better business decisions. It will help you determine how much you can afford to spend and what you need to sell each week to cover running costs.

"An accurate forecast gives you the hard facts to make better business decisions."

Be realistic about cash timing
The sales forecast is about predicting the total sales you hope to make in the next year. Your calculations will feed into the cash flow forecast.

However, a cash flow forecast is about the timing of the money. Knowing which months will be cash short and which months might see a cash surplus is valuable business management information. You can identify when you may need a loan arrangement to tide you over, and when might be the best times to buy needed assets for your business.

This means you need to identify when you’ll actually be paid for sales, so you can complete a cash flow forecast more accurately. Bear in mind that payment is often slower than anticipated. This common error can distort your cash flow forecast. Timing will be affected by:

  • The credit terms your offer.
  • The effectiveness of your creditor management and debt collection.
  • Whether people are able to pay you on time.

Consider including a provision for bad debts, which are likely to be higher during an economic downturn.

Once you know how much income you expect, and when you expect it, all that is left is to put these figures into the correct weekly or monthly columns in your cash flow forecast.

Completing your forecast

Your sales forecast needs to be as accurate and reliable as you can manage. After all, you will be committing yourself to expenditure and loan repayments based on the forecast. If you underestimate, then you will not be able to cover your costs. If you overestimate, then you may not have enough working capital to cover your day-to-day cash requirements.

Consult with others
Rather than preparing your sales forecast in isolation, involve the right people to get the best input and projections. Talk to your advisers and to employees with relevant responsibilities, like sales, marketing, purchasing and planning staff.

Get help from your accountant before presenting your sales forecast to lenders or investors. Prepare two versions: a worst-case scenario and a most-likely scenario. Over-optimistic forecasts can undermine your credibility and increase business risk.

Next steps

  • Talk to your customers about their purchasing plans for the year ahead.
  • Try to anticipate any competition that could undermine your plans.
  • Compare actual sales with your forecast on a regular basis – keep a sales graph on the wall as a constant reminder of your performance – and be ready to respond quickly if necessary.
  • Remember to market constantly − it’s very easy to fall into the trap of fulfilling existing orders and forgetting to look for the next orders, especially if you are working on your own.

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