How to Forecast your Business Sales

Predicting potential sales for your business is a very important process; you should have a strong idea before you commence your business of your likely sales. It's unlikely you will be right on the money but if you don't make a realistic effort your business plan will likely fail; forecasting is an essential element to your business stratgey.

The amount of money your business will make each year depends on how many sales of its products or services - but before you start the process of actually making these sales you should create a sales forecast. The sales forecast for your business will stand on its own merits - it will of course be a part of your overall business plan.

Why bother with a sales forecast?

A sales forecast is necessary in order to

Predict your cash flow - your forecast might predict slow times of business where you may need a cash injection to pay for products or just to pay the staff for example
Manage Cash flow - central to the success of your business, it is essential that you understand how sales forecasting contributes to the calculation of the cash flow forecast.
Plan future resource requirements - for example, the number of staff needed to manage your orders and provide a certain level of service.
Plan marketing activities - this will obviously have a knock on effect to the amount of sales you make as well.

Quite clearly constructing a sales forecast for your business is key to your business success - you should continually re-evaluate your sales forecasts - by looking at actual sales to your forecasted sales firstly you can measure if you have done well or not

What elements do you need to think about?

Your sales forecast should show sales by month for at least the next 12 months, and then by year for the following two years. Three years, in total, is generally enough for most business plans.

You need to consider

Are there any similar products or services already being provided in the area?
What is the size of the market?
Is the market growing or declining, and if so, by what percentage each year?
What are the main considerations for this market?
Have you seen any factors that may influence it in the future?
How do seasonal factors affect purchases of your product or service?
What trends or fashions are relevant to the sector?

Who are your customers going to be?

How many customers will actually buy your product or service?
Will they leave a different supplier to come to you?
How much will you charge
Can you actually provide the products and services that you are predicting?
How many competitors do you have?
Your business will not be unique; what happens when new competitors enter the market once you have done the groundwork to raise market awareness?

You must be clear about how your products or services fit into the marketplace. How can you differentiate your business from your competitors' businesses? Just how flexible with regard to pricing and the range of products or services offered can you be?

Preparing a forecast

All businesses need to base their forecasts on certain assumptions regarding potential changes that may take

place in the future. These can be quantified and could include:

An expectation of market growth or decline by a certain percentage, for example 10%.
Planned expansion in the number of employees to generate an expected 20% increase in production.
A move to a better location that should produce a 50% increase in sales.

Preparing your forecast

If you sell more than one product or service, you should prepare a separate forecast for each item in your range,

and forecast:

By volume (for example, units of the product sold per month).
By value (for example, total revenue gained from each product or service sold).
By a combination of both value and volume.

So what are the pitfalls when forecasting sales?

Make sure your forecast is based on verifiable, realistic and unbiased information.
Don't be tempted to ignore your research if it showed negative results.
Don't make projections solely on the basis of historical performance. Keep looking at what else might affect your sales in the future and adjust your forecast accordingly.
Make sure you understand your capacity limits. Is it physically possible to produce the amount of sales being forecast with the personnel, equipment and financial resources available to you?
Does the pricing policy you have used in calculating your sales forecast relate to what is really achievable, or conversely, have the prices been set too low so that either way your forecast is potentially unrealistic?
If you have just started up in business, have you considered that it may take longer for your business to become established, and have you set accordingly realistic sales targets?
Have you allowed for the possibility that high sales based on an initial promotional surge may drop off, leading to a need for more intensive marketing and higher ongoing costs once initial interest has peaked?
Can you identify and justify the assumptions you have made in reaching the forecast, and explain them to interested parties if necessary?