How much will your business sell next month? What about next quarter? Or next year?
If you’re scratching your head right now, we get it. It’s 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? It’s not. Here’s what you need to know to estimate your future sales—without throwing a dart at a board.
What is a sales forecast?
A sales forecast is an estimate of what your business’s future sales will be. You’ll use sales data or other methods to make educated guesses about your future sales revenue. Sales forecasting can happen on a monthly, quarterly, biannual or annual basis.
Objectives of sales forecasting
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 of sales forecasting is to keep your business operations running smoothly, which is tough to do if you don’t know where you’re 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, you’ll want to be proactive about inventory and consider bringing on additional help.
Basically, your sales forecast is your business’s guiding star as you make decisions about your next steps.
Why is sales forecasting important?
1. Set better sales targets
You want to grow your business, which means you set sales targets for yourself or your salespeople (or maybe both). But, if you aren’t 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. That’s information you can use to set sales targets that motivate you and your sales team—rather than discourage them.
2. Make strategic decisions
We mentioned this above, but it’s 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.
3. Prepare your business for the future
You don’t have a crystal ball, but your sales forecast is the next best thing. These sales projections can give you at least a rough idea of what’s 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, it’s that you can’t 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.
Benefits of sales forecasting
A sales forecast is critical for a solid business foundation. Here are a few other convincing benefits that an accurate sales forecast can lead to:
- Additional funding: if your business has investors or needs investments, a positive sales forecasting model demonstrates the potential for success and growth, which is appealing to investors. Remember to include cash reserves and allowances to cover you during slower months.
- Quick action: your sales forecast will help you fend off any unpleasant surprises by correcting course immediately. For example, if you see that your actual sales are trending 25% below your forecast, you can dig down to the root cause and get things back on track—rather than being surprised by disappointing numbers when it’s too late.
- Streamlined hiring: most business owners know that hiring can be stressful and time-consuming. Your sales forecast will help you see when you might need additional staff on your team, particularly if your business has some seasonality.
Sales forecasting methods
You understand the merits of a sales forecast, but how do you actually build one? There are a number of different sales forecasting methods you can use. Let’s look at some of the most common ones here.
1. Historical sales forecasting
If you’ve been in business for a while, you have some historical data that you can rely on to predict future sales.
If your future sales stay true to your past sales over the last year, what’s likely to happen in your business? That’s the root of this sales forecasting method. You use past metrics to estimate your future sales.
- Pro: you’re basing your forecast on existing, actual sales figures from your business.
- Con: things change quickly, which can lead to an inaccurate sales forecast. Anything from environmental factors to new competitors can mean your existing sales data no longer holds true for the future.
2. Intuitive sales forecasting
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 you’ll use your intuition to create your sales forecast.
For example, if you’ve seen increasing demand for your product or service and are hearing a lot of buzz about it, you’d likely predict growth.
- Pro: it’s helpful for newer businesses that don’t have a lot of historical data to use.
- Con: the future is tough to predict, which means this method can lead to inaccurate sales forecasts.
3. Sales per square metre forecasting
Commonly used for bricks-and-mortar businesses, a sales per square metre 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.
- Pro: helps you understand how a retail store is performing and how you can improve efficiency by displaying or marketing different products.
- Con: it fails to account for any online or e-commerce sales.
4. Opportunity stage forecasting
Who’s 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? That’s at the heart of opportunity stage sales forecasting. With this forecasting method, you look at a customer’s stage in your sales pipeline. Generally, the further along they are, the more likely they are to buy.
You’ll 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.
- Pro: you’re gaining a deep understanding of customer behaviour, which can be enlightening.
- Con: forecasts can be inaccurate, because this method relies a lot on historical data and doesn’t account for a number of other factors like how long a customer has been in your sales pipeline.
5. Gross sales forecasting
This is another method that’s 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.
- Pro: helps you uncover which of your products or services are top sellers.
- Con: it can be time-consuming to get the data you need and run the numbers.
That’s by no means an exhaustive list of sales forecasting methods and models—there are plenty of others you could use, depending on what information you have available.
How to forecast sales
We’ve 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.
1. Know your timeline
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, you’ll need to know what sort of time period you’re looking at.
If you’re including your sales forecast in your business plan, it’s 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: we’re forecasting sales for the next month.
2. Choose a sales forecasting model
Next up, you’ll need to pick the sales forecasting method you want to use. When choosing a method for your business, consider:
- Your business type: do you have a bricks-and-mortar location?
- The age of your business: do you have historical data to reference?
- Access to data: what sales data or market research can you get your hands on?
- Sales process: do you have an established sales flow or pipeline to monitor?
Still not sure which forecasting model is right for you? Don’t be afraid to test out a few different ones to figure out which one works best.
EXAMPLE: we’ll use a historical sales forecasting model as a predictive indicator of our future sales for the next month.
3. Run the numbers
Once you’ve landed on a model, you’re ready to run the numbers. Make sure you get the data you need. In the case of our example, you’ll 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, you’d use this formula to project sales for the next month:
Monthly revenue x (1 + % growth) = forecasted sales
In the case of our example, that would look like:
$25,000 x 1.02% = $25,500
EXAMPLE: we’re forecasting $25,500 in revenue over the course of the next month.
4. Set your sales quotas
Now that you have a better handle on what’s possible for your business, it’s 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. It’s wise to set a quota a little beyond your forecast so you give your team something to work towards.
EXAMPLE: the sales team should achieve $26,000 in sales by the end of next month.
5. Prioritise transparency and accountability
Keep in mind that a forecast is an educated guess, which means it’s 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 you’re doing.
6. Learn and evolve
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.
What if you don’t have historical data?
This example we outlined used the historical forecasting model. But new businesses that don’t have a baseline will find it impossible to forecast sales that way. They’ll 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 sources—such as the department of revenue for your state/territory or the Australian Bureau of Statistics.
Sales forecast example
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, you’ll want to include:
- Prior quarter sales
- Percent growth
- Forecasted sales
Let’s look at a simple example. Imagine that your sales in Q4 of 2020 were $50,000, and you’ve been growing steadily by 5% each quarter. Here’s 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 it’s all pulled together.
Sales forecasting with QuickBooks Online Cash Flow Planner
If you’d prefer to take some of the work out of manual sales forecasting, accounting software like QuickBooks Online can help.
The Cash Flow Planner 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.
Keys to accurate sales forecasting
A sales forecast is most helpful to you when it’s accurate, but that’s easier said than done. Here are a few best practices to keep in mind to achieve more accurate sales forecasts:
- Maintain sales data so you have information you can use to inform future forecasts.
- Define a clear sales process that details the typical steps taken to complete a sale.
- Create benchmarks for average sales, such as the time it takes to close a sale or your number of new vs returning customers.
- Set up a CRM so you always have a handle on who’s in your pipeline and might complete a purchase.
There’s no foolproof method for sales forecasting—it’s a prediction and not a guarantee. But these tips can help you ground your forecast in reality rather than optimism.
Business insights gained through sales forecasting
Forecasting your business sales can feel like one big guessing game. However, it’s an important business tactic for a variety of reasons, including the fact that it helps you:
- Plan your inventory
- Mitigate supply chain problems
- Hire effectively
- Manage risks
- Monitor your cash flow
And there is so much more. If you’ve 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 you’ll have a more accurate idea of where your business is headed—as well as what you need to do to get there.
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