How much will your business sell next month? What about next quarter? Or next year?
If youβre scratching your head right now, we get it. Itβs tough to predict the future, but a sales forecast can help you get a handle on your upcoming sales revenue so that you can make informed and strategic decisions.
Sounds too good to be true? Itβs not. Hereβs what you need to know to estimate your future salesβwithout throwing a dart at a board.
A sales forecast is an estimate of your businessβs future sales. Youβll use sales data or other methods to make educated guesses about your future sales revenue over a certain period. This allows you to plan for demand and effectively manage cash flow, resources and inventory. Sales forecasting can happen on a monthly, quarterly, biannual or annual basis.
Planning for the future is crucial for any business. Sales forecasts help you understand what your future sales will look like so you can create a budget accordingly and set reasonable goals. Depending on the type of business you run, sales forecasts can assist in resource-planning or ordering inventory so youβre prepared to meet customer demand.Β
Through sales forecasting, you can also identify any potential issues in your sales pipeline or supply chain ahead of time and make necessary adjustments to keep your business performance on track.
In short, accurate sales forecasts support a successful business today and in the future. Externally, they help you provide a great customer experience and maintain a good reputation. Internally, they inform sales targets and support operational planning, so your business is a well-oiled machine year-round.
Sales forecasts are typically created on a monthly, quarterly, biannual or annual basis. That said, thereβs no right or wrong answer as to when you should create a sales forecast. It all depends on whatβs most relevant and useful to your business.Β
For example, if your business has very predictable sales on a yearly cycle, you may only need to create a sales forecast annually. If your sales tend to fluctuate seasonally, it may be more appropriate to forecast sales quarterly or biannually.Β
In general, the more often you forecast, the more likely it is that your predictions will accurately reflect your current business. Regularly refreshing your sales forecasts accounts for external influences such as changing market conditions.
Generally, itβs a good idea to forecast for up to 12 months ahead. The further ahead you forecast, the less accurate your predictions will be. After all, things are constantly changing and so will your business. You want your sales forecast to reflect those changes.
Keep in mind your sales forecast is a living document. Itβs a good idea to update it regularly to account for your changing business conditions and the broader market.Β
In large organisations, sales forecasts are usually handled by sales managers or analysts. For small businesses, sales forecasting often falls in the hands of the business owner.Β
If you run a small business, the good news is you can take some of the effort out of sales forecasts with accounting software like QuickBooks Online. With all your financial data available in QuickBooks, you can quickly and easily create forecasts and use them to create budgets. You can also use QuickBooksβ Cash Flow Planner to automatically predict cash flow for up to 90 days ahead.Β
Several internal and external factors can impact your projected sales. These include:
Sales forecasts can be used to guide virtually every area of a business. For example, as a small business owner, you can use sales forecasts to:
Sales forecasts are a useful tool for predicting future sales but theyβre not the be-all and end-all. Things change constantly and even small shifts in your business or the wider industry can have a material impact on your revenues.
Think of a sales forecast as an educated guess about whatβs going to happen. While it provides guidance, itβs not set in stone. You can revise and adjust your forecast to account for changes to your business, your customers and the broader market.
If a sales forecast is nothing more than a best guess, why bother? Understanding your sales cycle, sales process and sales pipeline will help you make smarter business decisions when it comes to:
The overall objective ofΒ sales forecastingΒ is to keep your business operations running smoothly, which is tough to do if you donβt know where youβre headed.
For example, if your sales forecast tells you that your custom pottery shop is going to hit a slow period after the festive season, you might want to cut back on some nonessential expenses. Conversely, if you forecast a big uptick in growth, youβll want to be proactive about inventory and consider bringing on additional help.
Basically, your sales forecast is your businessβs guiding star as you make decisions about your next steps.
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You want to grow your business, which means you set sales targets for yourself or your salespeople (or maybe both). But, if you arenβt using sales forecasting to inform your sales targets, you run the risk of setting unrealistic goals.
Sales forecasts use past performance and other data to predict future sales. Thatβs information you can use to set sales targets that motivate you and your sales teamβrather than discourage them.
We mentioned this above, but itβs worth reiterating. Your sales forecast will help you make informed decisions about everything from staffing and inventory to new product lines and your marketing efforts.
For example, if your sales forecast projects numbers that are significantly lower than what you hoped, you might decide to explore new revenue streams or reevaluate your pricing.
You donβt have a crystal ball, but your sales forecast is the next best thing. TheseΒ sales projectionsΒ can give you at least a rough idea of whatβs to come, so you can prepare your business plan and approach budgeting with that in mind.
If you see that major growth is on your horizon, you can direct your team to order supplies, stock appropriate inventory and get all hands on deck.
Of course, if the global pandemic has taught us anything, itβs that you canβt always predict the future. However, a sales forecast will help you understand your sales pipeline and plan for both best- and worst-case scenarios using realistic and accurate numbers.
A sales forecast is critical for a solid business foundation. Here are a few other convincing benefits that anΒ accurate sales forecastΒ can lead to:
You understand the merits of a sales forecast, but how do you actually build one? There are a number of differentΒ sales forecasting methodsΒ you can use. Letβs look at some of the most common ones here.
If youβve been in business for a while, you have someΒ historical dataΒ that you can rely on to predict future sales.
If your future sales stay true to your past sales over the last year, whatβs likely to happen in your business? Thatβs the root of this sales forecasting method. You use past metrics to estimate your future sales.
An intuitive sales forecasting model relies mostly on your gut feelings and those of any of your sales reps. You have your finger on the pulse of how your business is doing, and youβll use your intuition to create your sales forecast.
For example, if youβve seen increasing demand for your product or service and are hearing a lot of buzz about it, youβd likely predict growth.
Commonly used for bricks-and-mortar businesses, aΒ sales per square metreΒ sales forecasting method uses the following calculation:
Total sales / square metres = sales per square meter
Physical retail stores will compare this number to similar stores in their area to use as an indication of how efficient their location is. It also gives them an idea of what they can expect for sales numbers moving forward.
Whoβs more likely to buy from you: Customer A, who just learned about your business, or Customer B, who has engaged with your business for a while and even purchased a few of your products before?
Probably Customer B, right? Thatβs at the heart of opportunity stage sales forecasting. With this forecasting method, you look at a customerβs stage in your sales pipeline. Generally, the further along they are, the more likely they are to buy.
Youβll look back at your conversion rate data, and then uncover how likely a customer is to purchase at each stage of your sales process. That will help you predict your future sales based on real data.
This isΒ another methodΒ thatβs based on real numbers. Choose a specific product or service, and look at your daily sales for that specific item.
Crunch the numbers to determine your average daily sales of that item for each month, which you can use to make an estimate about your sales of that product or service for the entire year. Repeat that process with the other items your business offers to get a grasp on your total sales.
Thatβs by no means an exhaustive list of sales forecasting methods and modelsβthere are plenty of others you could use, depending on what information you have available.
Weβve covered some of the most popular forecasting methods. But when it comes to actually digging into the numbers and pulling together your own sales forecast, here are the steps you need to take.
Your sales forecast predicts your future sales. But how far into the future? Are you trying to figure out what your sales will be for the next month? The next quarter? The next year?
Before you dig into the numbers, youβll need to know what sort of time period youβre looking at.
If youβre including your sales forecast in your business plan, itβs smart to predict sales for each month over the course of the next year. Then you can estimate sales per year for the next three to five years.
EXAMPLE:Β weβre forecasting sales for the next month.Β
Next up, youβll need to pick the sales forecasting method you want to use. When choosing a method for your business, consider:
Still not sure which forecasting model is right for you? Donβt be afraid to test out a few different ones to figure out which one works best.
EXAMPLE:Β weβll use a historical sales forecasting model as a predictive indicator of our future sales for the next month.Β
Once youβve landed on a model, youβre ready to run the numbers. Make sure you get the data you need. In the case of our example, youβll need to pull reports from your accounting software to understand your historical sales performance.
Imagine that you made $25,000 in revenue last month and sales have consistently been growing 2% over the prior month every month.
Using that information, youβd use this formula to project sales for the next month:
Monthly revenue x (1 + % growth) = forecasted salesΒ
In the case of our example, that would look like:
$25,000 x 1.02% = $25,500
EXAMPLE:Β weβre forecasting $25,500 in revenue over the course of the next month.Β
Now that you have a better handle on whatβs possible for your business, itβs important that you set a benchmark for success. Use your sales forecast to establish sales quotas to work towards.
You could set a monthly quota, quarterly quota or even an annual quota. In addition, you could set an overall quota or individual quotas for each of your team members. Itβs wise to set a quota a little beyond your forecast so you give your team something to work towards.
EXAMPLE:Β the sales team should achieve $26,000 in sales by the end of next month.Β
Keep in mind that a forecast is an educated guess, which means itβs your job to monitor your sales performance and see how close to your forecast and goals you come.
You should also include your team members in those updates so they understand their progress toward their own sales quotas.
It can be helpful to invest in a customer relationship management (CRM) platform to track all of your customer data and keep your team on the same page about how youβre doing.
You might surpass your forecast and quotas, or you might fall short. Keep in mind that this is a learning process.
Take the time to reflect to see how accurate your predictions and goals were. If they were way too aggressive, then maybe you want to try a different forecasting method.
Remember that making improvements and adjustments over time is all part of the forecasting process.
This example we outlined used the historical forecasting model. But new businesses that donβt have a baseline will find it impossible to forecast sales that way. Theyβll need to use one of the other methods we discussed.
Not having any existing data to lean on can be frustrating. In those cases, your best bet is to use existing data and market research from other sourcesβsuch as the department of revenue for your state/territory or theΒ Australian Bureau of Statistics.
A good sales forecasting plan should be a flexible working document that can be updated as your business needs change. With this in mind, focus on three key areas:
Your sales forecast plan should detail the financial figures youβll be estimating and the time period youβre forecasting for. Financial figures can be broad, such as total revenues for a certain timeframe, or more granular, such as projected cash flow over the upcoming quarter. The time period can be a month, quarter, year or whichever amount of time makes most sense for your business.
Plan to review your forecast at regular intervals, such as once a month or quarter, and make adjustments as necessary. Itβs also a good idea to review your forecast any time a significant change impacts your business. For example, you might want to revise your financial estimates if your business has expanded or youβve introduced new products or services.
Donβt assume that your current sales forecast format will work for you forever. Think creatively and try to find different ways of analysing your sales data so your forecasts are as accurate as possible. Consider what factors you might not have accounted for that could impact your future revenues. If possible, have a financial adviser or trusted contact review your numbers and see if they can find any gaps or identify better ways of estimating your sales.
Sales forecasts can include a lot of different information, from moving averages to seasonality. The details your sales forecast incorporates depends on your business and what data is most helpful to you.
At a bare minimum, youβll want to include:
Letβs look at a simple example. Imagine that your sales in Q4 of 2020 were $50,000, and youβve been growing steadily by 5% each quarter. Hereβs what your sales forecast could look like:
This is a simplified example, and you might want to get more into the nitty-gritty by spelling out different units, costs per unit and more. However, this example will help you understand what your sales forecast can look like when itβs all pulled together.
If youβd prefer to take some of the work out of manual sales forecasting, accounting software like QuickBooks Online can help.
TheΒ Cash Flow PlannerΒ in QuickBooks Online uses historical data and artificial intelligence to forecast cash flow 90 days in advance. Using more than 60 billion anonymised data points, the Cash Flow Planner predicts future cash inflows and outflows 30 and 90 days in advance. The interactive tool also gives you the option to adjust future transactions to see how those changes would affect cash flow, helping you plan ahead and make informed decisions about your money.
A sales forecast is most helpful to you when itβs accurate, but thatβs easier said than done. Here are a few best practices to keep in mind to achieve more accurate sales forecasts:
Thereβs no foolproof method for sales forecastingβitβs a prediction and not a guarantee. But these tips can help you ground your forecast in reality rather than optimism.
Forecasting your business sales can feel like one big guessing game. However, itβs an important business tactic for a variety of reasons, including the fact that it helps you:
And there is so much more. If youβve previously thought of sales forecasting as nothing more than throwing a dart at a board, think again.
Forecasting is a valuable exercise that can help you build a thriving and resilient business. Use this as your guide, and youβll have a more accurate idea of where your business is headedβas well as what you need to do to get there.
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