Sales forecasting is crucial to business planning. It enables you to set out your revenue projections for the months ahead. Making such calculations might appear daunting, but it's a necessary step if you want to ensure that your business develops successfully, says Aengus Collins
According to Geoff Hurst, marketing director at the Chartered Institute of Marketing, sales forecasting is a cornerstone of the business-planning process. "Sales forecasting is essential. If you don't plan, you can't know where you're heading. And if you don't know where you're heading, you shouldn't be surprised if you end up nowhere."
When forecasting sales, the objective is to be thorough and realistic. There is no such thing as perfect forecasting, but making well-informed assumptions is your best hope of making sure you end up with useful figures.
Because most businesses face fluctuations in demand, produce monthly sales forecasts. Bring these together in a spreadsheet to provide projections for the 12 months to come. You can compare these figures against your likely monthly costs to establish cash flow projections.
Compare against last year
Breaking down your total sales into different products (maybe even into different customers) could make forecasting easier. If you sell via more than one location or channel, be sure to consider each.
If you've been in business for some time, last year's trading figures provide useful points of reference. Consider how many customers you are likely to lose and gain. Which products should perform well and which ones might struggle? How long will it take you to establish new products? If you had a particularly good or bad month last year, what were the reasons and are they likely to be a factor this year?
Once you have made your sales forecasts for this year, you can use last year's figures as a benchmark to see whether your estimates are realistic. As the months go by, you can use your actual sales to amend your forecasts for the rest of the year.
Understand your market
Sales forecasting is more challenging for new businesses. If this applies to you, as well as sales you have made so far, be guided by market research. Knowledge of potential and existing customers as well as the influence of competitors is invaluable when forecasting.
"Sales forecasting is an art as well as a science," Hurst adds. "Imagination must be used to determine factors that will hinder as well as help your sales success. But this must be tempered with hard-headed research and detailed analysis of the facts.
"Sales forecasting should not be about breaking even, what you did last year or setting unrealistic targets," Hurst argues. "It relies on an accurate assessment of the market."