Sales forecasts are the backbone of business planning. Business growth is measured by its growth in sales and your sales forecast sets the standard for expenses, profits and growth.
Sales forecasts are key to conducting a business. An in-depth sales forecast should help you develop and improve your strategic and operational plans while increasing your knowledge of your industry and establishing potential economic change. If you are willing to go an extra mile; month-by-month forecasts provide best and the most accurate results, but it can take some time to crack them down.
When it comes to forecasting sales many avoid this activity completely as it can be difficult to predict the future. But don’t be afraid, while forecasting does take some practice, it doesn’t take any mathematics or any other advanced degrees.
Before you begin, it is important to note that your sales forecasts won’t predict your business future 100 percent. This exercise is to help you estimate your potential business growth and to understand the sales drivers and interdependencies, to connect the dots so that as you review plan vs. actual results every month, you can easily make course corrections.
HOW TO FORECAST SALES
Start with your objectives, are you running a sales forecast for a business plan, or are you looking to predict the future of your business on much more regular basis?
A forecast for a business plan usually has quite in-depth data for the first 12 months and then it includes yearly estimates for about 3 years. While a forecast for operational business planning can be amended to fit any time period, we recommend running an in-depth monthly forecast, followed by a yearly forecast. Additionally, if you are bringing a new product to the market you should still create an estimated sales projection. A golden rule is to run an in-depth one for 12 months and then run yearly estimate it for 3 or 5 years.
Match your books
To begin forecasting you need to look at the way your accounting tracks your sales. Look at how accounting breaks down your services or products.
If accounting breaks your product down to hours, meals, rides, components or just plain product, match your chart of accounts line by line for your forecast.
Doing so will help you track and measure your projections. If you don’t match these categories well enough you are going to lose valuable time retyping and recalculating.
Use past data, but not too much
If you have past sales data, use it! Your best forecasting aid is the most recent past. There are some statistical analysis techniques that take past data and project it forward into the future, ProForecast can help you do just that and integrate your forecasts to future scenarios.
All of the sophisticated techniques that professional forecasters use look at the past data. But the past by itself isn’t the best predictor of the future. It is recommended that you analyse all of the potential influences to your business, whether it is any market fluctuation or impacts of Brexit. You can read more about what can impact your business in our articles about threatcasting and scenario planning.
If you have a new product or if you are starting a new business and looking to make a sales projection, look at what can impact your business. Break it down by finding important decision factors or components of sales. If you have a completely new product with no history, find an existing product on the market to use as a guide. A good market research will help you establish what competitors are doing and how will market fluctuate in the next couple of years or so.
A step that seems to be missed out often is projecting prices. Once you projected unit sales monthly and annually you must look at their projected pricing. This section is crucial if you are operating in a volatile market, think 2007 or Brexit – will that affect your product’s price?
Additionally, we recommend looking at some methodologies used in demand forecasting to assume the projected price of your product. Analyse the market and any outside influence that can affect it, also, look at your supply chain (if you have one), find out what can affect their industry and how will it have an effect on them. For example, if you work in construction industry, what market changes can affect the price of bricks and how will that impact your product cost?
A sales forecast should look at the average cost per unit and any associated costs of that product or service. This is called COGS, also know Cost of Goods Sold. For example, COGS for a manufacturer include raw materials and labour costs to manufacture the goods. Additionally, you want to look at any other costs associated with that sale, so anything that goes for marketing and any costs that you have for achieving those leads, or getting people in your shop.
Set Gross Margin
All of the information that you gathered should already be shaping up the future of your business the potential of your business. But you want to look at these costs closer because a lot of financial analysis focuses on gross margin.
Once you have sales projection and direct costs, you can calculate your estimated gross margin. All of this will give you a solid sales forecast that you can use for the rest of your financial projections.