Maria Peloponisiou~ 5 min Reading time | 30. Dec 2019
A sales forecast is ultimately the backbone of any business plan. You can see how much your business is worth and how much it’s growing by the sales. Your sales forecast will ultimately set the standard for your profits, growth, and expenses.
When you’re forecasting sales, please make sure that you don’t believe everything you read about it. For example, some people are told that you need to have a degree in mathematics, or you need a lot of training to understand it. This is not the case at all, simply because there’s a lot of guesswork involved in forecasting.
What this means is you should not expect it to be perfect, it just has to be reasonable. Every single business owner is qualified to forecast their sales, you just need to know how to do it.
What Is Sales Forecasting?
Sales forecasting involves estimating your company’s future sales. This allows you to make more informed decisions while also allowing you to predict the company’s performance in the long and short-term. You can case all of your sales forecast on economic trends, past sales data, and any suitable comparisons.
Businesses that are quite established find it much easier to predict any future sales. Businesses that have just started up will have to use competitive intelligence along with market research to help them make their sales forecast.
Why Is Sales Forecasting Important?
Sales forecasting is important because it tells you and others how well your business is performing. As soon as your sales forecast is done, you’ll find it so much easier to work on your balance sheet, profit and loss, and your cash flow. In addition to this, the sales forecast can help your business to set goals. It can help you to understand:
What you want to achieve
How many customers you need
How much your customers will spend
Your sales forecast will also help you to understand how much money your business should be spending. If you want your business to be profitable, you can use your sales forecast to help you work on the marketing aspect of your business. It will also help you to understand how much you need to spend on administration and business operations.
Sales Forecast Methods
Having an accurate sales forecast is absolutely vital. In fact, it’s just as vital as hitting your revenue target. Below you will find methods that are effective and help you to get the most accurate predictions:
The Lead Value Method
This method involves analysing sales data from all of your lead sources. You can use the data to create your forecast based on the value of each of these sources. When you assign a value to the sources you get a better idea as to which one of the sources can be turned into revenue.
You will need to use the leads for each month for the previous time period. The lead-to-customer conversion rate, and the average sales price by each source. To get the average sales price by each source, look at your customer database and work out which is the lead source. To get the average lead value, calculate each value by its source. Multiply the sales price (average) by the close rate (average).
Your average lead rate = the average sales price.
To get the number of leads, divide the revenue total by the average lead value. Please note, you should talk to your marketing team so you know what their plans are and where their expected lead flows will come from.
The Opportunity Sales Forecasting Method
This method tends to be one of the most popular out there. This is because it can predict the probability of a specific opportunity. To use this method, you will need to know what your average sales cycle is. Once you have mapped out your sales cycle processes, you’ll have a good idea as to how well they will close within the specific forecasting period.
Create your sales forecast by multiplying the amount of every opportunity but its probability of closing.
Your expected revenue = Deal amount
How to Create a Sales Forecast
When you create a sales forecast, it should show the sales month-by-month. It should do this for at least the next 12 months. It can show the sales for the next 2 to 5 years. However, if you’re writing a business plan, you’ll typically find that 3 years is enough.
Show every line of sales that you have separately and make sure you add them up. If you have 10 or more lines of sales, summarise them and consolidate them. You don’t have to go into too much detail though.
Here’s how to make a sales forecast:
Create a unit sales projection Forecast the sales month-by-month.
Use your past data This is the best tool for forecasting. Use statistical tools to help you create the last 2 years of data. Add the data to a line chart so you can see it and track it easily.
Break down purchases into factors This can help you to see your sales per square foot of your store. For example, break down your store into sections such as the bread department. This can help you to project your future sales.
Project prices Add the units of the different sales items and estimated the prices in another section. Finally, multiply the units x price to get the sales (units x price = sales).
Get the average cost per unit This is the sales minus the cost of sales. This sum is the amount of money that you pay for the products that you sell.
Calculating your cost of sales This can be done by multiplying the cost of sales by the unit average cost. This will give you your sales forecast which can be used for further financial projections.
Not every business will be able to use this sales model. Some have sales forecasts that look at dollar or line sales before looking at the direct costs. It’s important that you use the sales model that works for you. However, when you find the right one, it will help you to predict your sales forecast for many years to come.