Any business owner will know how critical it is to plan for the future. Whether this is through the overall structure of the business, the innovations and growth and hiring employees.
However, before you can successfully plan for these things, you need a sales forecast.
A sales forecast estimates the amount of goods and services you can reasonably expect to sell over a specific period of time - which is typically done in quarters over around three to five years.
With these figures, the costs incurred will be taken into account and then the forecasted net profit will be generated. This gives a business and potential investors a good insight for how well you expect the business to operate.
But how would you even begin to do a sales forecast for your business? Well, there are three main methods; historical, top-down and bottom-up. We're going to examine these in much more detail with our guide below.
So, if you're ready to learn much more - then read on for all the answers!
Methods For Sales Forecasting
The first you need to know before creating your sales forecast is what the main methods are. While there are plenty out there that you can choose from, there are three that are primarily used by businesses.
These are historical forecasting, top-down forecasting and bottom-up forecasting. Each has their own rationale and all of them are perfectly acceptable ways to devise a sales forecast.
Let's take a look at them in more detail.
The first method we will look at is historical forecasting. This method is based specifically on your business's past performance. Of course, for this method to be viable, your business must have been operational for at least one year.
You can then refer back to months, quarters and years to examine the sales and there may be clear reasons for an influx - which can be useful for your sales strategy in the next year, and of course for your sales forecasting.
Of course though, if you have a new business - then this method is not possible.
Top-down sales forecasts begin by examining the overall size of the market and then estimate what percentage of the market your business can operate within and capture.
For example, let's say the market size is $20 million and your business can capture 10% of this market, then the sales forecast would be $2 million for that year.
It's worth noting that for this forecast method, you need to have a professional examine your numbers and provide you with a reality check.
Some business owners are highly optimistic and sometimes this puts them into unreasonable or delusional thinking.
Therefore, having an independent figure review your forecasting is highly beneficial to thoroughly examine what percentage of the market and customers you can reasonably expect to attain.
Devising a bottom-up forecast requires you to project the number of units you sell and then multiply that number by the average cost per unit.
Larger businesses will take into account things like locations, online interactions and sales representatives.
The idea behind a bottom-up forecast is to start with the smallest number of components within the forecast and then build up from there.
The best part about this method of forecasting is the ability to change variables as and when needed (like rep numbers).
How To Create Your Sales Forecast?
After you have examined your options and finally chosen your sales forecast method, you will then need to take several steps. These are the following.
List Your Goods And Services
To ensure your forecast is accurate, you need to first account for every single product and service that you are selling.
This step will depend on your forecasting method. Each one is a little different:
You need to project the quantity of each product and service you will sell, and then you need to multiply the unit price by that figure.
Of course, with this method, you can base your estimate on a previous sales figure (assuming there are/were no major changes).
For example, if you sold 50k worth of your products in June, then you can estimate 50k worth of your products in July.
You need to start by estimating the total market for each sold item. Once you have done this, you need to project how much of the market you can (reasonably) capture.
For example, if you capture 7% of an overall market of $1 million - then your estimated sales are 70k.
You need to start by estimating the total number of orders that your customers are going to place on your website and other sales avenues. Afterwhich, you estimate the average price and deduct any discounts you apply.
Lastly, you have to multiply the estimated orders figure for each of your items by its average cost to get the estimated revenue.
Depending on market conditions, political and regulatory changes or marketing projects, you may need to make reasonable adjustments to your forecast.
You will now need to deduct the costs of your goods and services that you sell from your estimated sales forecast, so you have a better understanding of your profit margin which will be generated via sales.
You may wish to consider things like:
Is There An Easier Way To Do This?
If you are having trouble creating your sales forecast, there is some softwares out there that can help you. These include:
Sales Forecasting Software
This type of software can use historical business data and trends to generate a business report of expected sales revenue, and it can do this by comparing targets with real sales.
This kind of software will help you to answer things like what your expected revenue is, how actual sales performed against expected sales and which forecasting method produces the most accurate forecast results.
This focuses on pipeline management and gives you an analysis on existing opportunities and what your success rate may be in pursuing them. This type of software is often seen with platforms like QuickBooks or PipeDrive.
Historical Sales Software
As its name suggests, this type of software examines and analyzes previous data to create an average sales number which you can reasonably expect to reach in the following month(s), quarter and year.
It specifically looks at historical data, trends, seasonality of your goods and services, and other critical information. The only snag is that it does not consider opportunities within your pipeline.
This type of software is most ideal for small businesses that do not have or do not expect huge changes and swings in their monthly sales.
Creating a sales forecast is very important for your business's future success and it can provide you and other investors with much clearer information.
We hope our guide was able to give you a better understanding of how to create your own!
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