How to Prepare Sales Forecasts

Introduction

Sales forecasting is the process of estimating what your business sales will be in the future. The sales forecasting period can be monthly, quarterly, semi-annually, or annually.

Sales forecasting is a critical part of business management. Without a clear understanding of your future sales, you can’t manage your inventory, cash flow, or plan for growth. The aim of sales forecasting is to provide information you can use to make smart business decisions.

For example, if your forecasts indicate a 30% increase in sales of products or services, you may want to start looking for larger business spaces and hiring additional staff to meet the demand. Conversely, forecasts of declining sales can allow you to mitigate the impact by taking proactive measures such as cutting expenses or redirecting your marketing efforts.

How to Prepare Sales Forecasts

Sales forecasting is an estimate of the quantity of goods and services you can realistically sell during the forecasting period, the cost of goods and services, and the estimated profit.

This is typically done by:

1. Creating a list of goods and services you will be selling.

2. Estimating the number of each good or service that will be sold.

3. Multiplying the unit price by the estimated number of goods or services to be sold.

4. Determining the cost of each good or service.

5. Multiplying the cost of each good or service by the estimated number to be sold.

6. Subtracting the total cost from the total sales.

If you have a large number of items in inventory, it may be necessary to condense sales/unit costs into categories.

Assumptions in Sales Forecasting

There are several factors that can significantly affect sales and should be the foundation of your sales forecasts, including:

1. The economy and your specific industry: Is the economy slowing down? Is the market for your goods and services growing or declining? Is there more competition entering the market? Are you likely to gain or lose any key customers? Your sales forecasts should include an estimate of the growth or contraction rate in the market.

2. Regulatory changes: Sometimes new legislation or regulations can affect your sales prospects, positively or negatively. Your products or services: Are you launching new products or services that may increase sales, or are sales of your current products/services declining due to better or cheaper products/services from competitors? Will you have to raise prices due to increased material, labor, or other costs, and how might that affect sales?

3. Your marketing efforts: Are you starting new marketing campaigns or spending more or less on advertising? Are you launching a new company website or enhancing your email marketing or expanding into social media to boost sales? Are you hiring additional sales staff or losing your top salesperson?

Sales Forecasting for Established Businesses

Sales forecasting for established businesses is easier than for new businesses; the established company already has a foundation for sales forecasts from past sales. Revenue from one month of the previous year, along with knowledge of general economic and industrial trends, works well to predict the company’s sales in a particular future month.

If you have repeat customers, you can check in with them to see if their purchasing levels are likely to continue in the future. If you don’t want to reach out to them directly, you can infer future activity based on the health of the customer’s industry.

Sales Forecasting for New Businesses

Sales forecasting for new businesses is more challenging as there is no historical sales data. The process of preparing sales forecasts for a new business involves researching your target market, trading area, and competitors and analyzing your research to estimate your future sales. See three methods for sales forecasting and sales forecasts for your business plan for further clarification.

Example

Sales Forecast for 6 Months

Creating a set of sales forecasts using a range of projections is a good idea, especially for new businesses. After setting up an initial forecast using your best estimates, prepare another forecast based on optimistic figures and another based on pessimistic figures. Update your forecasts with actual values over time.

Monthly sales forecasts will give you a more realistic expectation of your business performance than a single “annual” sales forecast. You can also update your forecasts in more detail if necessary; for example, you might want to do this on a weekly basis if you’re concerned about meeting a monthly sales target.

Accounting Software Makes Forecasting Easier

Business accounting software packages like QuickBooks can generate sales forecasts, including individual forecasts by customer, based on current sales data. See 6 Benefits of Using Accounting Software for Small Businesses before purchasing accounting software for your small business, and the Best Accounting Software for Small Businesses.

Source: https://www.thebalancemoney.com/sales-forecasting-2948317