Forecasting sales

Every business needs to forecast sales to budget effectively

Why do I need to forecast sales?

You need a sales forecast because your sales provide the income for the business. Without sales, you have no business. However a forecast will also enable you to set sales targets, budget effectively and prepare a cash flow forecast. Without an accurate forecast of sales you will not be able to determine how much you can afford to spend.

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How do I know how much I am going to sell?

A new business has no previous sales figures on which to base a forecast, so will need to carry out market research to prepare a credible forecast. Ideally, get promises of orders in advance of starting your business. Also, interview potential customers. Depending on your business and circumstances, you may be able to test the market with trial products or start in your spare time before committing yourself completely.

If you are already trading, you can base your forecast on current sales. But you should still talk to your customers about their expectations. Will they continue to buy from you? Are they looking for something different? Can you supply it? In short, stay close to your customers. What will be the effect of additional marketing or price increases?

Look at trends in the sector and in the overall economy. Look at how the buying habits of your customers are changing. Look at what your competitors are doing. What effects might that have?

Set a target for contacting potential customers. Some of these will turn into enquiries. And, in turn, some of these will turn into sales. As you gain experience, you will be able to estimate a conversion rate from original contacts, through to enquiries, and then to successful sales.

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What information do I need to make a good estimate?

It is not easy to predict sales accurately, as all businesses are affected by external factors as well as by the choices customers make. A good sales forecast will allow for all these factors.

  • If you are already in business past performance is a good place to start. If you are starting a new business make a forecast based on rigorous market research.
  • Market trends may give an indication of whether you can expect sales to go up or down. Talk to customers about their own expectations regarding future purchases; ask prospective customers about their buying plans.
  • If you are already in business, what is the effect of additional marketing? Are you planning extra marketing?
  • Look at external factors - the state of the economy generally, inflation, interest rates, exchange rates, etc. What effect might these have on your sales?
  • What is the alternative to your product or service? How do you retain customer loyalty? Do you keep innovating to retain customers?

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Should I overestimate or underestimate my future sales?

A sales forecast needs to be as accurate and reliable as you can manage. After all, you will be committing yourself to expenditure and loan repayments based on the forecast. If you overestimate, then you may not have enough working capital to cover your day-to-day cash requirements.

Remember, though, that there is a difference between forecasts and targets. Your forecast is your best prediction of what might actually happen. Use this to set your budgets and monitor carefully so that you do not overspend.

In addition, you might set rather more stretching targets. If you achieve higher targets, then you will need to revisit the forecast and the budgets - but an ambitious target can be a real motivator to achieve higher levels of sales.

Remember that prospective funders will be looking closely at your sales forecast. After all, it is the sales that produce the income - and the profit - so that is what makes the business an attractive proposition.

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What if I do not meet my sales targets?

If sales are falling short of your forecast, then you will quickly run into problems. The most immediate effect will be lack of cash to pay your debts as they fall due. But your profitability will also quickly fall. So you need to act quickly to discover why sales are low and to remedy the problem.

  • Aim to raise the profile of your business through additional promotion - perhaps through advertising, but also through press coverage if you can manage it.
  • Revise your cash flow forecast and talk to the bank at an early stage if you think that the problem is temporary and that you will just need a short-term cash injection.
  • Take steps to cut out all unnecessary expenditure.
  • Keep a close eye on performance - if there is no improvement, then you may need to consider the future of your business.

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Who can help me prepare a sales forecast?

If you need assistance to prepare a sales forecast - and a marketing plan - then there is help available. Your bank manager or accountant may also be able to recommend marketing support.

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Hints and tips

  • Talk to your customers about their purchasing plans for the year ahead.
  • Try to anticipate competition that could undermine your plans.
  • Compare your actual sales with your forecast on a regular basis - keep a sales graph on the wall as a constant reminder of your performance - and be ready to respond quickly if necessary.
  • Do not forget the need to market constantly - it is very easy to fall into the trap of fulfilling existing orders, and forgetting to look for the next orders, especially if you are working on your own.

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