Putting together a sales forecast is one of the very important first steps for any starting business and is of great value. Even if you do not have a complete business plan, having at least a sales forecast is a great advantage for managing successfully your business. Still many entrepreneurs complain that building a forecast with any degree of accuracy is nearly impossible and takes great deal of time, so they try to avoid it. Don’t be one of them.
Your sales forecast is not about guessing the future. It is about laying out the sales drivers and trends while considering your business, market, customers and competitors. After you have reasonable and sound sales forecast at your disposal you should start monitoring your monthly results versus your forecast and take the corrective actions when the deviations show up. You will soon discover that navigating your business between actual results and planned targets is what successful business management is.
As Tim Berry says: “If you think sales forecasting is hard, try running a business without a forecast. That’s much harder”.
Understanding your market is the foundation on which you will build your sales forecast numbers. To understand your market you will need to carry out a market research. Research and describe your target market segments and the types of customers in that market. Classify the segment according to previous sales volume or potential sales volume.
Now based on your market research, you should be able to understand what is the demand for what you’re selling. You should be able to define your current market position including any strengths, weaknesses, opportunities or threats versus your competitors’ strengths, weakness, opportunities and threats.
Based on that market information try to create assumptions about the number of customers you expect to attract or retain in order to start building your sales forecast.
If you have sales history you can forecast the number and value of sales you expect to make based on that while still considering the market research you already performed. For example forecast your sales growth on your sales history, but if you see new opportunities for expansion in your market research, do not hesitate to add that growth possibility to your sales forecast.
If you are starting a new business or launching a new product, use your market research to find useful records about sales performance in businesses similar to yours.
From here on it should be an easy math calculation. Start with making your sales forecast for the next 12 months. You should set targets for the sales you would assume you could make and figure out ways to achieve your target.
Forecast, based on your history and market research, volume units sold, price per unit, and multiply to get the month-by-month sales number. List sales by product or product groups, or even market segment.
If you are hesitating about the volume measurement, you could go without it. But it is also an option to consider different units such as time (man-hours), projects, trips or anything that could ease your forecasting process.
It is important to keep your forecasts realistic. For example if you have history of 10% sales increase year over year, and you see that market is growing similar to that rate, but you forecast 20% growth, you should be able to back up that with new marketing activities or promotions etc.
For example if you forecast for a coffee shop, estimate number of customers that you could attract monthly based on number of tables you have and customers that could visit on a daily basis. Then estimate sales of different product groups based on the visits.
If you are starting a new online business, find information what is the monthly search of your product over the search engines, then consider search engine optimizations for your web site in order to drive traffic. After that calculate your conversion rate in order to get approximate sales numbers.
Cost of sales and gross margin forecast
Cost of sales, direct costs, per-unit costs or cost of goods sold are all interchangeable terms. For your sales forecast just include the cost of each product that is sold and multiply it by the projected sales volumes for that product. That gives you total direct cost.
Cost of sales is reviewed in percentage to sales as well in order to be easily comparable between different companies. For example if company X has cost of sales 100K USD at 55% from sales and other competitor company Y has cost of sales 130K USD, but at 45% from sales, means that company Y is more profitable.
This is actually how gross margin is calculated – Sales less Cost of Sales. Gross margin and gross margin percentage to sales are used as instant measure of your underlying profitability. This margin is very important, since it shows relatively what part of the revenue is available for supporting costs of the business, and of course how much room for business growth activities is left. General rule is that the higher the margin percentage is, the better, but it really depends on the industry of the business as well. So in the above example Company X will have 45% Gross Margin and Company Y will have 55% Gross Margin, hence it is more profitable.
Not all businesses have direct costs – some service businesses don’t have direct costs, so they have a gross margin of 100 percent. A lot of services do have direct costs though. For example, freight companies have gasoline costs, truck maintenance costs, drivers’ salaries etc. If you are hesitating about what are your direct costs, consider what are the costs that you have directly for your product in order to deliver it to the customer or the shelf of your store.
Track your progress
Sales forecasting is not about precisely predicting the future, because that’s impossible. It is about laying out your assumptions so you can navigate your business between actual results and planned targets effectively. Commit to review your sales results monthly. Track the difference between what you expected and what actually happened. Dealing with the differences between forecast versus actual results unnoticeably leads to developing strategy, tactics, and execution. Once you have set up the processes of forecasting and monitoring results of your business, you will begin to realize the huge benefits of planning.
If you need some help on getting started with your sales forecast and actual results analysis, you can check out our Sales Forecast and Analysis advanced model and template.
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