Sales forecasting is the process of estimating future sales. Accurate sales forecasts enable companies to make informed business decisions and predict short-term and long-term performance. Companies can base their forecasts on past sales data, industry-wide comparisons, and economic trends.
Sales forecasting is a key element of any business plan, which you must compose if you’re starting a venture or making significant changes within an existing business. Accurate sales forecasting helps you, as a small business owner, to make better, more informed decisions.
Sales forecasting is not about guessing the future correctly. We’re human; we don’t do that well. Instead, it’s about assumptions, expectations, drivers, tracking, and management.
You review and revise your forecast regularly. Since sales are intimate with costs and expenses, the forecast helps you budget and manage. You measure the value of a sales forecast like you do anything in business, by its measurable business results.
Sales Forecast Template
This sales forecasting template, gives you a sample sales forecast document you can edit to suit your business. The Excel spreadsheet lets you compare and analyze multiple products and services by enter monthly units sold, unit price and cost of goods sold (COGS). The template then calculates the total revenue, growth rate, margin per unit, and gross profit. The document contains 3 sample forecast templates you can use.
Sales Forecasting Overview for Start-Ups or New Businesses
Sales forecasts are an inexact science, especially when you’re a new business with no previous sales figures of your own to use as a guide. If you're new, a feel for what the local marketplace by studying your target industry, talking to comparable businesses, doing the legwork to find out what people are willing to buy and at what price, and examining your competition. Check with state and federal agencies for relevant data.
Sales Forecasting for Established Businesses
Base your forecasting on your history, which will come from your accounting summaries by line of sales. This takes much of the guesswork out of the process, showing you exactly what your business has achieved in customers, units and sales.
Based on the trending you see, month-to-month and year-to-year, overlay your strategies and tactics. How many more customers will you be able to attract and how often will they buy? What will the effect of investment be? How many more units will you be able to sell?
What is your pricing strategy going forward.
How to Forecast Sales
Sales forecasting is much easier than you think, and much more useful than you imagine.
For a business plan, make your sales forecast a matter of the next 12 months and the two years after that.
Think of it as rows and columns. Guess your unit, then price per unit, and multiply to get the sales that result.
But how do you know what numbers to put into your sales forecast?
The math may be simple, yes, but this is predicting the future, and humans don’t do that well. Don’t try to guess the future accurately for months in advance.
Instead, aim for making clear assumptions and understanding what drives sales, such as web traffic and conversions, in one example, or the direct sales pipeline and leads, in another. Review results every month, and revise your forecast. Your educated guesses become more accurate over time.
Experience in the field is a huge advantage
If you don’t personally have the experience, try to find information and make guesses based on the experience of an employee, your mentor, or others you’ve spoken with in your field.
Use past results as a guide
Use results from the recent past if your business has them. Start a forecast by putting last year’s numbers into next year’s forecast, and then focus on what might be different this year from next.
Do you have new opportunities that will make sales grow? New marketing activities, promotions? Then increase the forecast. New competition, and new problems? Nobody wants to forecast decreasing sales, but if that’s likely, you need to deal with it by cutting costs or changing your focus.
Look for drivers
To forecast sales for a new mobile app, you might get data from the Apple and Android mobile app stores about average downloads for different apps. A good web search might also reveal some anecdotal evidence, blog posts, and news stories perhaps, about the ramp-up of existing apps that were successful.
Estimate direct costs
Direct costs are also called cost of goods sold (COGS) and per-unit costs. Direct costs are important because they help calculate gross margin, which is used as a basis for comparison in financial benchmarks, and are an instant measure (sales less direct costs) of your underlying profitability.
Never forecast in a vacuum
Never think of your sales forecast in a vacuum. It flows from the strategic action plans with their assumptions, milestones, and metrics. Your marketing milestones affect your sales. Your business offering milestones affect your sales.
Your sales are supposed to refer to when the ownership changes hands (for products) or when the service is performed (for services). It isn’t a sale when it’s ordered, or promised, or even when it’s contracted.
With proper accrual accounting, it is a sale even if it hasn’t been paid for. With so-called cash-based accounting, by the way, it isn’t a sale until it’s paid for. Accrual is better because it gives you a more accurate picture, unless you’re very small and do all your business, both buying and selling, with cash only.
Live with your assumptions
Sales forecasting is not about accurately guessing the future. It’s about laying out your assumptions so you can manage changes effectively as sales and direct costs come out different from what you expected. Use this to adjust your sales forecast and improve your business by making course corrections to deal with what is working and what isn’t.
I believe that even if you do nothing else, by the time you use a sales forecast and review plan versus actual results every month, you are already managing with a business plan. You can’t review actual results without looking at what happened, why, and what to do next.
Download attached Sales forecasting template