Methods of Sales Forecasting
Ask any sales manager or small business owner about the most difficult duties of their job and you're likely to hear projecting sales and profits. Methods of sales forecasting used can vary depending on the business.
So much depends on being able to accurately project what income will be coming into the business. It can determine if additional staff can be added, if projects can be pursued and, most importantly, if the business can meet its financial obligations to employees, vendors and owners or shareholders.
Sales Forecast versus Sales Goals
Is a sales forecast the same as a sales goal? Not necessarily. A sales forecast is a realistic prediction of what a business can achieve in terms of sales revenues. Sales goals, on the other hand, could be set higher than forecast to motivate sales personnel. However, some businesses do set both the forecast and goals to be the same amount.
Historically Based Sales Forecasting
If a business has been in existence for a number of years, a track record of sales will be available to reference. If no major changes to the market or the business are anticipated, it is relatively easy to predict that sales results will be similar for the coming year. The forecast, then, is simply plugging in the past sales figures as projected revenues for the following year, plus (optimistic forecast) or minus (pessimistic forecast) a small percentage.
Historically based forecasting is often used for businesses with large volumes of transactions, particularly those with smaller per sale dollar amounts. Examples: Restaurants, retail.
Forecasting Contract Business
Businesses such as consulting, real estate, construction and manufacturing typically sell on contract.
Contracts that are somewhere within the approval process, with revenues projected to be realized in the coming year, are usually included in forecasts. These include:
- Contracted Sales. Any customer contracts that have been signed and will be fulfilled in the coming year.
- Tentative Sales. Contracts that have been submitted, but not yet signed and accepted by the clients. Typically when a sale is at this stage, it has a greater chance of actually occurring and is usually included in a sales forecast.
However, these contracts may not include all business that's anticipated to be received in the following year. Additional forecasted amounts could be based on historical sales data.
Forecasting Sales in New Businesses, Changing or Unknown Markets
When no track records exist because a company is experiencing dramatic and sudden market changes, entering a new market, or the business itself is new, sales forecasting is much more akin to gambling than science!
In these difficult cases, the following can be used to help build a forecast:
- Sales for Similar Operations. This can be difficult if not impossible to obtain, especially for independent small businesses, but may be available for businesses such as franchises where franchisors regularly track this data. The sales results for a similar franchise operation in a similar market can then be used when creating the initial forecast.
- Breakeven Analysis. Looking at the projected cost of goods sold (COGS), expenses and investments that a new business or venture will incur can create a breakeven revenue level that needs to be met to keep the doors open. During the first year or years, sometimes achieving breakeven can be quite an accomplishment! This is due to the higher investments in such things as advertising, equipment and personnel needed to get it going. Forecasting sales for breakeven, plus any additional sales that the business feels it can achieve, might be a place to start.
During the early years of new and changing businesses, adjustments to sales forecasts (upward or downward) may need to be made in response to results throughout the year in addition to annually.
Forecasting Sales Growth
Forecasting sales growth should be based on factors that could legitimately increase sales, not wishes or intuition. These could include:
- Promotional advertising.
- Increased sales staff or activity.
- Anticipated changes in the business or marketplace that can positively impact sales.
For projecting growth due to increased advertising or sales activity, anticipated response and conversion rates can be used. Response and conversion rates from previous efforts can be used to forecast additional sales for new campaigns. If no track record exists, it will be difficult to make this determination. In those cases, industry standard responses can be used. Example: Direct mail response has traditionally been noted as having a rule-of-thumb response rate in the low single digit percentage range. Not all of those will ultimately buy, of course! So expecting massive sales growth from a single mailing would be unrealistic.
- Learn about measuring advertising.
- See more about measuring advertising realistically.
For increased sales efforts, a business can rely on past sales-call-to-sales-closed ratios to determine what would be a realistic forecast. Example: If a business knows that for every 10 sales calls it makes, one will lead to an actual closed sale, it can more easily determine what results might be realized from increased sales activity.
The additional number of sales anticipated would then be multiplied by the average sale to determine a realistic forecast for growth.
Forecast versus Actual Sales
Sales forecasts are usually done annually at minimum, being reviewed quarterly, monthly, weekly or even daily depending on the business. In response to changing situations, forecasts may be revised. Though there may be exceptions, for small businesses, usually weekly or monthly reviews are an adequate minimum review interval.
It is unlikely that sales, no matter how carefully forecasted, will exactly match actuals. Any major deviations, whether positive or negative, from the forecast should be investigated for probable causes. What qualifies as a major deviation can vary with the business and industry. For some, even a couple percentage points deviation could be devastating event or a cause for celebration.
Possible causes for deviations from forecast could be any of the following:
- Overly optimistic or pessimistic forecasting
- Tentative or even contracted sales that did not materialize... and why they didn't.
- Unexpected events such as weather disasters which can either decrease or improve sales depending on the business (e.g. home improvement stores may experience additional sales when storms cause property damage to an area).
- Unexpected or unusual sales that are not expected to repeat in the future.
- Problems with sales or service personnel or systems.
In addition to reviews of forecast versus actual sales for the current year, actual sales are usually compared with the same periods in the previous year to identify possible trends. This is where noting major deviations is helpful. Example: An HVAC business had a July sales figure that was 30 percent ahead of forecast due to an unusually hot and humid summer. If this year's July sales were 30 percent down when compared to those of the previous year, it would not be seen as problematic. It was seen as a result of an unusual weather condition that is not a trend.
Once anomalies are identified, a more realistic and reliable forecast for the following year, based on actuals, can be developed.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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© 2013 Heidi Thorne