Your sales forecast refers to the process of predicting future sales performance based on historical data, market trends, and other relevant factors. It is an essential aspect of business planning as it helps organizations to anticipate demand for their products or services and make informed decisions regarding production, inventory management, and resource allocation.
Sales forecasts can be short-term or long-term, depending on the business's needs and objectives. Accurate sales forecasting is critical for businesses to remain competitive in today's fast-paced market environment.
The approach to take when preparing a forecast is dependent on the business's level of development, but all forecasts should be founded on accurate and current market research. All businesses are required to base their forecasts on certain assumptions regarding potential future changes. These are quantifiable and may include:
A prediction that the market will expand or contract by a certain percentage, say 10%.
A planned increase in the number of employees is anticipated to increase output by 20%.
A relocation to a new and superior location is expected to increase sales by 50 percent.
In addition, it will be useful to break down projected sales by market, product, or geographic region, as well as to consider the likely inquiry-to-order conversion rate.
New Businesses
A new business will have no historical information on which to base its forecast. Numerous formal methods of estimating future sales are only useful if the business has been operating for some time and has a sales trend history to work with. Accurate market research is essential for a startup business, as you will still need to make justifiable projections.
Secondary or desk-based market research can be beneficial; for example, a person planning to open a bed and breakfast could obtain historical data on bed occupancy levels or visitor numbers from the local tourist authority or Regional Development Agency. Sales projections can be calculated by multiplying average occupancy levels by price per person per night while accounting for seasonality.
If you do not have access to historical sales records or documentary research, you can still conduct primary or field research among your target customer group. Interviewing prospective clients, obtaining 'letters of intent,' and testing the market with some advanced / prototype products or services can provide valuable information for estimating future sales potential.
Existing businesses
Existing businesses will have historical sales data on which to base their forecasts, as well as a better understanding of the market. Monthly, you should maintain accurate and up-to-date sales figures and compare them to the goals you've established.
Current sales levels can be used to estimate future sales, assuming that existing consumers will continue to purchase from your company for the foreseeable future.
Nonetheless, your company's sales may have been consistently increasing or decreasing. In this situation, you should determine the predominant trend in past sales and then project this trend forward to provide an overall picture of future sales.
You should discuss potential changes in purchasing patterns with key customers and routinely review market trends. In addition, it is essential to consider the probable impact of any adjustments to the sales strategy, such as additional marketing and price increases or decreases.
Existing businesses should not overlook the significance of conducting ongoing market research and incorporating this data into their sales forecast. This is essential for maintaining a competitive advantage and ensuring that the forecasting process is based on current data and market intelligence.
Preparing your forecast
If you sell multiple products or services, you should create a separate forecast for each product or service. Each forecast must consider the following:
The anticipated sales volume, such as the number of units that will be sold per month. Many service businesses sell in units, just as many product-based businesses do. For instance, accountants sell their time and restaurants sell food.
The price at which you anticipate selling the item. The price charged will affect the volume of sales, and the total revenue earned by the business is therefore equal to the volume of units sold multiplied by the unit's price.
The anticipated number of consumers to whom you will sell. Do you anticipate recurrent business from every customer or are your sales one-time transactions?
A restaurant's sales can be forecast by examining a reasonable expectation of the number of tables that will be occupied at different hours of the day and then multiplying the percentage of tables occupied by the average estimated revenue per table, based on assumptions about the number of meals sold and the average price paid.
Pricing strategy
A pricing strategy can be determined by weighing both quantity and cost. If your business is a fast-food restaurant, for instance, will it sell a large volume of items at low prices, or will it sell a small volume of items at a premium price, as in the case of an upscale French restaurant? Consider what the market will bear, how much it will cost to produce your products or services, and how much you must charge to make a profit.
Additionally, it is possible to determine how many consumers who match the customer profile reside in the area. This form of research can benefit from the use of online resources.
This will help with estimation:
How frequently your product will be purchased.
The price at which you can sell the product.
It is possible that adjusting your price could have a significant impact on your sales. You must consider the impact of any decisions on total revenue and profitability when producing your forecast.
This will allow you to estimate the total number of sales per week, month, and year for your company. These numbers can be preserved in a spreadsheet and plotted against high, medium, and low monthly sales expectations using a simple graph.
It is essential to compare forecasts (and historical sales data, if applicable) to potential capacity to ensure that what is forecasted is achievable. You must ensure that you have sufficient personnel and resources to meet production and sales goals or to provide the required level of service.
Other factors, such as the target market, the location of your business, and the quality of the offered product or service, will also influence pricing policy decisions.
Choosing a Forecasting Method
The method of forecasting you select will depend on the information your organization intends to obtain from the process. If it has been in business for some time, you can use historical sales data as a starting point for your forecasts.
After a few weeks or months of trading, you will be able to apply these techniques to a new business and compare the actual sales figures to the projections you made based on your market research.
Graphical Analysis
Past sales data should be plotted on a line graph to provide a visual representation of seasonal patterns and general direction. In this way, various sales figures can be plotted for different scenarios, allowing you to see clearly what would occur if sales increased or decreased, as well as the effects of different business strategies.
Moving averages
Moving average is an indicator that displays the average level of sales over a specified time period. It can be a useful forecasting instrument, but it requires the use of historical sales data to predict future increases or decreases. Then, it is feasible to forecast sales for the upcoming year in order to calculate and graph a three-month and twelve-month moving average.
The three-month moving average smoothes out significant monthly fluctuations but does not eliminate seasonal variations. However, the twelve-month moving average provides a broad trend line.
Add the expected sales figures for the current and previous two months and divide by three to acquire the three-month moving average forecast for each month.
The twelve-month moving average can be computed by adding the current month's sales forecast to those of the eleven preceding months and dividing by twelve.
Once the forecast has been created, it should be utilized. You should use it to establish objectives and create budgets, to raise funds, and to identify any necessary personnel and resources. The forecast will also provide insight into how your company can influence its future strategy by correlating sales with promotional expenditures and pricing.
In addition, you should compare actual results to the forecast, routinely revise the forecast based on this comparison, and conduct sensitivity analyses to consider "what if?" scenarios, such as what would happen to the forecast if the number of customers dropped by 10%.
Numerous aspects of sales forecasting are inextricably intertwined with other aspects of the business planning procedure; therefore, you must be cautious with your assumptions. Use the following checklist to avoid common pitfalls in sales forecasting:
Is the forecast supported by verifiable, realistic, and objective market research data?
Have you possibly disregarded the findings of the study if they are negative?
Do not make projections based exclusively on historical performance. Continually assess what else could affect future sales and adjust the forecast accordingly.
Is it physically possible to produce the anticipated sales volume with the available personnel, equipment, and financial resources, or is the forecast based on fanciful thinking? In other words, do you comprehend your capacity limits?
Does the pricing policy used to calculate the sales forecast correspond to what is actually achievable, or have the prices been set too low, rendering the forecast unrealistic in either case?
Do you comprehend the relationship between sales and expenses and, by extension, the meaning of profitability? Remember the adage, "turnover is vanity and profit is sanity."
Did you also conduct sensitivity analyses when preparing the sales forecast?
If you have just started a business, have you considered that it may take longer than desired for your enterprise to become established and for sales goals to be attained?
Have you accounted for the possibility that high sales resulting from an initial promotional surge may subsequently decline, necessitating more intensive marketing and higher ongoing expenses?
Every month, you should review your sales performance and compare it to your goals. This will help you anticipate cash flow needs and will be helpful when adjusting future forecasts.
Spreadsheets and specialized software can greatly facilitate the forecasting process.
Are you able to identify and defend your forecasting assumptions, as well as explain them to interested parties if necessary?
One final bit of advice follows.
Even if you've worked diligently and spent a considerable amount of time accumulating detailed information that you used to make informed decisions, don't stop once you've developed a "final" set of numbers. If you haven't been unusually pessimistic in developing this initial forecast, consider it your best-case scenario. Consider the things that are most likely to go wrong, presume that they will, and adjust your spreadsheets; accordingly, this is your worst-case scenario. Lastly, it's unlikely that everything will go your way, but it's also unlikely that everything will go against you, so adopt a third approach that avoids both extremes, recalculate the numbers, and call that your most likely case.