Sales forecasting is essential for short and medium-term business planning. An accurate forecast can help you manage your cashflow and allocate the resources you need to meet your business objectives. Bryan McCrae explains how to build an effective sales forecast
Sales forecasting is a key part of business planning and enables you to work out what your revenue is likely to be from month to month over a fixed period. Without this knowledge, it is difficult to sensibly see what funds are going to be flowing into your business and make practical decisions about stock purchasing, staffing levels and investment in equipment and premises.
If you over-estimate or under-estimate your sales, it can create problems. "If you have more sales than you expect, for example, then you may not have the resources to fulfil them," says Bryan McCrae, owner of Cognitive Sales Consulting. "At the very least you will have unhappy customers and at worst you will lose some of them."
Predicting your likely sales is not a matter of holding a finger up to the wind, but should be based on experience, market knowledge and the structure of your business. It is essential to record a range of sales-related information accurately for each of your sales channels.
If you are a small firm with just a few channels, an Excel spreadsheet should be sufficient for this. If your sales processes are more complicated, consider a Customer Relationship Management (CRM) system with forecasting capability.
Always start with last year's trading figures and look for seasonal patterns. Unless there has been a change in your market, these are likely to be repeated.
"Think of your forecast as a dashboard," advises McCrae. "The more dials, gauges and instruments you use, the more you should be able to figure out what is going on. Factor in anything that might have a significant effect on sales. Last year's figures are a good starting point but you need to ask whether anything has changed."
This might include losing - or recruiting - a sales person, opening a new branch, new competitors or a change in pricing. Look at your ongoing sales efforts, too - what stage are you at with new customers? What is on your order book at present?
By continually monitoring your sales efforts, you will also be able to see where the strengths and weaknesses are in your sales operation. Should you be putting more resources into certain products? Do sales of others repeatedly fall down at the same stage? What can you do about that?
Above all, your forecast must be realistic. Avoid forecasting sales that you want to achieve, rather than what you are likely to achieve. If your projections are unrealistic you will not be able to make worthwhile business development plans. It is better to under-estimate sales than to over-estimate and spend too much on resources.
McCrae warns against over-reliance on your forecast, however. "You don't want to get to the stage of analysis paralysis," he says. "Each individual deal is either won or lost - having 100 deals at 90% probability doesn't necessarily mean you are going to win anything."
Also vital is not ignoring that age-old indicator - the gut feeling. "Ask the sales person: 'If you had to bet your house on it, do you think we will win the business at the end of the day?'" he concludes.