It’s an intimidating task, looking into the future. The good thing is, none of us are fortune tellers and none of us know any more about your new business than you do. (If you do happen to be able to see into the future, please just skip the whole startup thing and go play the stock market. It’ll be much easier and make you richer!)
Sales forecasting is the process of estimating future sales with the goal of better informing your decisions. A forecast is typically based on any combination of past sales data, industry benchmarks, or economic trends. It’s a method designed to help you better manage your workforce, ash flow, and any other resources that may affect revenue and sales
What do you need for sales forecasting?
Sales forecasting can require a certain amount of financial information regarding a business overall operations. For instance, a service provider might estimate future sales of its services by analyzing past revenue data like subscriptions over the course of a month, quarter or year. Depending on the type of product or service a business sells, creating a sales forecast can encompass the following elements:
Specific goals and objectives
Setting specific and measurable sales objectives that ultimately influence a business revenue goals can be highly important when creating a sales forecast. For instance, if a company projects $30,000 in sales over the next year, the sales team might make quarterly objectives that aim to lower costs and increase revenue to further achieve the broader goal. Having a set goal can also help create a foundation for planning the sales process.
Outlined sales process
An accurate sales forecast can depend on having a documented and structured sales plan in place. The processes a business implements should be documented in a way that all professionals who are involved with company sales are knowledgeable on the practices in place. With a structured routine to how sales are approached, businesses can better predict future sales numbers.
Defined sales criteria
Each step of the sales process also needs to be defined in a way that all sales representatives, teams and team leaders are familiar with. The way businesses define the numbers of leads and customers moving through their sales funnels needs to be understood by all sales team members to accurately predict future numbers in a sales forecast.
Organizational method for sales data
Having a way to track and measure each customer that is acquired is also crucial to accurately predicting future sales revenue. Customer relation management systems are one valuable tool that businesses commonly use to track and measure the increase or decrease in sales, revenue and customer data. This information is highly valuable when creating a sales forecast.
Evaluation and assessment
Setting ways to evaluate and assess how staff and team members are meeting objectives can positively influence how accurate sales forecasting can be. Holding sales teams accountable for meeting individual and team sales quotas is one way to evaluate how a business is moving toward its revenue goals according to its sales forecast.
What is a sales forecast?
A sales forecast, or sales forecasting, is the process of evaluating sales data and making predictions and estimations about the value of future revenue a company will earn. Sales forecasting can offer valuable insight into a companys financial data, such as earnings, net profits, costs and expenditures and other financial information crucial to the business operation. Using this information can help businesses make effective financial decisions that further their growth and development.
Sales forecasting can also be applied to two circumstances a business will encounter: a business that uses its past financial and sales data to evaluate and predict future sales growth, or in the case of new businesses, using competitor and market research to analyze and make estimations of future sales growth. New businesses making sales forecasts may have to rely on information that can change as the market changes, which can make it more difficult to accurately predict new sales growth.
How to forecast sales
There are several methods for creating a sales forecast, however, using a historical model to calculate future revenue growth is one of the most common methods of sales forecasting. In the case of an established business, using the historical method to forecast sales will typically follow several steps:
1. Determine the product or service to be sold
The first step most companies take when creating a sales forecast is to determine what products or services they will sell over a specified period. For instance, a manufacturing company might determine they will sell a specific machine component and measure the period over one year. After listing the products or services they want to sell, businesses may then take the next step to estimate the value of goods they sell.
2. Estimate the total number of items to be sold
The second step in creating a sales forecast would be to estimate the total number of products the company expects to sell over the next year. This number would be based on past sales data for the same or similar items, and the company would use this information to estimate how many products they predict selling over the course of a year.
3. Determine and multiply the unit price
After estimating the number of items to be sold, the manufacturing company in our previous example could then determine the unit price it wishes to set for the specified product. This unit price is then multiplied by the total number of products the manufacturing company estimated in the second step. If the company projects selling 350,000 units for $125 per unit over a year, the company can expect to generate $43,750,000 in sales revenue.
4. Determine and multiply the costs of goods sold
Lets assume the same manufacturing company continues with its sales forecast. Using its projected revenue of $43,750,000, the company then determines the total COGS for producing its products. So they might calculate their COGS at $45 per unit produced, resulting in a total of $15,750,000 in COGS. Using this value, the company can then calculate the total expected sales revenue.
5. Subtract total cost from total sales
The final step is to subtract the total amount in COGS from the total amount in sales. In the example of the manufacturing company, their total COGS of $15,750,000 is subtracted from their total projected sales of $43,750,000 to get a sales forecast of $20,000,000.
While these steps illustrate an approach to creating a basic sales forecast, there can be other approaches businesses might use, depending on their industry, the products or services they provide and whether they have long-standing sales history or are newly established.
Why is sales forecasting important?
Sales forecasting can be critical for businesses and organizations that rely on their sales revenue for profits. Accurately predicting an estimated value that a company expects to earn over a certain time can help sales teams make sound decisions regarding marketing, advertising and other approaches to selling their products. Similarly, accurate sales forecasting can also help businesses analyze how to allocate excess revenue and lower expenses. Additional reasons why effective sales forecasting can be important for businesses include:
Monitoring sales performance
Sales forecasts can aid in monitoring sales performance and productivity by allowing companies to analyze sales numbers. Using this information, companies can see where performance is exceeding expectations or falling below them and can make adjustments to their approaches as necessary.
Gaining insight into competitor markets
Accurate forecasting can also provide businesses with insight into competitor markets. An accurate sales forecast can show companies their earning potential, and if the results fall significantly short of previous objectives, companies can determine if the cause is due to a change in the way their competitors present products or reach target markets. Using this information, businesses can tweak their approaches to reach target markets so they can achieve their sales and revenue goals outlined by prior sales forecasts.
Evaluating sales and marketing strategies
Forecasting allows for evaluating sales and marketing strategies to determine which methods generate the most sales. Knowing which approaches work and which strategies are falling short of set objectives can help businesses better develop methods for selling their products and services.
Setting sales goals and objectives
Creating a structured plan based on sales forecast data can help further sales goals and objectives. With specific and measurable goals, businesses can compare continuous results with projected sales forecast data to evaluate how close or far they are from reaching their goals. Accurate sales forecasting can also provide companies with valuable insight into which key performance indicators they might track to ensure objectives are being met.
Implementing development plans
Sales forecasting can help businesses create and implement development plans if sales teams are falling behind forecasted quotas. Individual improvement plans for sales reps can help them improve their approach to closing sales leads, acquiring new customers and helping sales teams meet their objectives. Implementing development plans can also offer opportunities to collaborate and share ideas that can further a business overall sales growth.
What is sales forecasting?
- List out the goods and services you sell.
- Estimate how much of each you expect to sell.
- Define the unit price or dollar value of each good or service sold.
- Multiply the number sold by the price.
- Determine how much it will cost to produce and sell each good or service.
What are the types of sales forecast?