Sales forecasting basics: A checklist
Master the basics of sales forecasting with these five tips.
Sales forecasts can help you manage cash flow, expenses, inventory, and more. Here are five tips to help you understand the basics of sales forecasting and create useful projections for your business.1
1. Create reasonable forecasts.
Your passion for your business gives you the energy to succeed, but don't let your enthusiasm lead you to overestimate your sales projections. Be realistic about the demand that exists for your products and services, the time it will take for marketing efforts to gain traction, and the potential opportunity within your target market. If your projections are reasonable, you'll be able to prevent cash flow problems and manage production more efficiently.
2. Define a complete sale.
How do you define a sale? If you are a restaurant — is it a table of two enjoying wine, dinner, and dessert? If you are an IT consultant, is it eight hours of on-site service? If you are a manufacturer of plastic cups, is it one unit of a product? By assessing your offerings — and how customers purchase them — you can forecast how many sales will occur in a month, given factors such as your store space, available billable hours, and distribution methods.
3. Account for price variations.
Not all sales are created equal. If you sell through distributors or other third parties, those sales may pay less than your retail price. Promotional deals and other discounts can also lower your sales revenue. When creating sales forecasts, account for these price variations by running different scenarios using varied price points or a well-reasoned average.
4. Plan for seasonal fluctuations.
Very few products or services are in demand 365 days a year. As you've probably discovered, some months offer higher sales potential, while other stretches are slower. Your sales projections should reflect how weather, holidays, and other seasonal variables might affect your sales.
5. Leverage past sales data.
You can improve your sales forecasts by establishing a baseline for average sales. To do this, review past sales data and use them to create future forecasts. For example, your September 2016 sales projection will likely be more accurate if you base it off of actual sales data from September 2015. Start with a month-by-month projection for the first 12 months. Once you've compiled past data, use annual sales figures for projections over the next four years. Make some assumptions based on a growing customer base and improved marketing tactics. Moving forward, this data can help you refine your forecasts.
Creating useful projections is an important part of building your business plan. Use these sales forecasting basics to get started. You may also consider creating a cash flow projection.
1 "How to Project Your Basic Business Numbers." U.S. Small Business Administration (SBA). (2015) https://www.sba.gov/blogs/how-project-your-basic-business-numbers
"Business Planning: Sales Forecast." SBA. (2011). https://www.sba.gov/blogs/business-planning-sales-forecast
"5 Tips to Help You Forecast Sales." SBA. (2012) https://www.sba.gov/blogs/5-tips-help-you-forecast-sales
"7 Tips for Improving Your Sales Forecasting." Inc. (2011) http://www.inc.com/guides/201105/tips-for-improving-sales-forecasting.html
"5 tips to improve sales forecasting." SalesClic. (2012) http://www.salesclic.com/blog/sales-funnel-blog/5-tips-to-improve-sales-forecasting/.