Sales forecasting is an ongoing challenge for large and small businesses. For the start-up it is a particularly frustrating task since the firm does not have past sales projections as a starting point. Thus, many times a “best guess” becomes the company’s estimate. However, there are a few things start-up and small businesses can do to ensure sales forecasts are reasonable and realistic, making sales forecasts a practical tool for business planning.
Remember, sales forecasts are used as a guide, thus as fluctuations occur in your sales volumes, your forecast should reflect these variations. While developing and monitoring your sales forecasts, you may find highs and lows you did not expect. Analyze and use this information when updating and projecting future forecasts.
Since you will be using your sales forecasts to project other business initiatives, it may be helpful to use three various prediction figures, conservative, moderate and ambitious.
Factors that may affect your sales forecast:
- seasons and weather
- special events
- competition, direct
- competition, indirect
- external labour events
- productivity changes
- demographic shift
- births and deaths
- fashions or styles
- population changes
- consumer earnings
- political events
- product changes, style, quality
- service changes, type, quality
- shortages, production, capability
- promotional effort changes
- sales motivation plans
- price changes
- shortages, inventory
- shortages, working capital
- distribution modes/pricing
- credit policy changes
- labour disputes/shortages
Purpose of Sales Forecasting
An accurate sales forecast affects all aspects of the business. If your company produces a product, it must establish production quantities, scheduled production times, while focusing on keeping inventory cost minimal. Also, determining the amount to purchase and when may save the company money when negotiating prices. An accurate sales forecast is key to determining promotional scheduling, cash flow requirements and how many people (subcontractors or employees) will be required to meet the sales target. Through planning, substantial cost savings can be realized if the sales forecast is within range.
Developing a Sales Forecast
- Determine industry potential
Consider your geographic target market and investigate its potential size. It is easier to estimate market size based on geographic or demographic characteristics than life styles or buying decisions. Use this information as a starting point. Use the information you have and estimate the potential size of your market within the locale you are targeting. Further segmentation is important, but should be analyzed in your marketing research and projections.
- Determine your firm’s sales potential
Figure out the maximum limit your firm can produce or provide in terms of sales. If you are a one-person operation, you must estimate the maximum number of hours you will be able to produce, deliver and sell the service. Remember to factor in time for sales and administrative duties, which are not actual sales. Decide how many hours a day and how many days you are willing to work. Subtract time for sales, developing promotional material, planning, bookkeeping and other administrative tasks. The remainder is the time you have available to actually provide the service.
Next multiple this figure by the number of weeks per year you will work and your hourly rate. This gives you the potential total sales figure for the year.
45 hours/week x $20/hour x 50 weeks/year = $45,000
This is the basis from which you are able to develop your sales potential – the upper limit for the firm based on production and marketing potential. This figure estimates what the firm could actually sell if the marketing strategy is implemented without flaw and the environment in which the firm operates is stable and predictable.
- Determine the Sales Forecast
Next, develop a realistic figure. This sales forecast takes into account an uncontrollable, unstable environment and margin of error in the implementation of marketing campaigns.
At the end of this process, you should be closer to determining if this is a viable target market and if it is sustainable over time.
Making a sales forecast involves estimating by month for 12 months the anticipated number of units (or hours), sales price and total sales for the stated period of time.
Number of units sold x sales price per unit = total sales forecast
Remember, using the example above, the maximum amount that the firm is able to produce is $45,000 so the sales forecast will fall below that range.
Typically, a business does more than one sales projection. Often firms, particularly start-ups will develop conservative, moderate and ambitious projections. If your company offers more than one product or service each will need individual sales forecasts.
Sales Forecasting Tips
- Determine/hypothesize the share of the market your competitors own.
- Consider the seasonal nature of your business – account for slower months.
- Typically start-ups will have low sales during the first six months to one year.
- Thoroughly analyze your target market in terms of size, willingness and ability to buy.
Sales Forecasting for an Existing Business
Sales revenues from the same month in the previous year make a good base for predicting sales for that month in the succeeding year. For example, if the trend forecasters in the economy and the industry predict a general growth of four per cent over the next year, it is acceptable for you to show each month’s projected sales at four per cent higher than your actual sales the previous year. As sales forecasts are not equal for each month, your four per cent increase should not be allocated evenly for each month. Peak sales months will likely allocate a higher percentage.
Credible forecasts can come from those who have actual customer contact. Get the salespeople closely associated with a particular product line, service, market or territory to give their best estimates. Experience has proven that grass roots forecasts can be surprisingly accurate.
Sales Forecasting and the Business Plan
Summarize the data after it has been reviewed and revised. The summary will form a part of your business plan. Sales forecasts for the first year should be presented monthly, while forecasts for the next year two years should be presented on a quarterly basis. Get a second opinion. Have the forecasts checked by someone else familiar with your line of business. Show them the factors you have considered and explain why you think the figures are realistic.
Your skills at forecasting will improve with experience, particularly if you treat it as a living document. Review your forecast monthly, insert your actuals, and revise the forecast if you see any significant discrepancy that cannot be explained as a one-time only situation. If you continually monitor your sales forecasts, your forecasting technique will rapidly improve and your forecasts will become increasingly accurate. This section outlines some simple methods of forecasting sales by using easy to find data. Books containing simple and sophisticated techniques of forecasting sales can also be found in libraries and in the business section of most bookstores.
Research, Research, Research
There are many sources of information to assist with your sales forecasts. Some key sources are:
- neighbouring businesses
- trade suppliers
- downtown business associations
- trade associations
- trade publications
- trade directories
- Statistics Canada