How to Forecast Sales Effectively
Anticipate your small business’s growth with accurate sales forecasting.
In business, planning ahead is a must. Sales forecasting helps businesses make sound financial decisions and is an important measurement of your company’s overall health. When you know what’s on the horizon, you can better adapt to changing conditions and prioritize your efforts toward building a better business. Here’s how to forecast your sales effectively.
Forecasting Versus Budgeting
First, let’s explore the differences between a sales forecast and a budget. A budget is usually created annually and lays out expectations for revenue, expenses and profit. “Budgets are more of a promise,” says AJ Sue, a business consultant in Wisconsin. “At the end of a set time period, this is what I will deliver to you.”
Forecasting sales, on the other hand, is a self-assessment tool. It looks at past and current sales data to predict a business’s future performance. “The forecast is a correction, a restatement, a new and improved view of what is happening,” Sue says. “It’s more of a wake-up call that allows us to adjust, maybe worry a little bit, or celebrate.”
But just knowing the difference a sales forecast and a budget isn’t enough to effectively plan for the future. Here are a few tips to help your business accurately predict its future sales.
Know Your Sales Data
The key to effective sales forecasting is your ability to analyze the totality of information around your business’s sales. Look at how your numbers compare to last year. If there is a big variation, what is causing the change? Have you added new territory? Lost key clients? Has new competition entered the marketplace? Has the economy changed? Learn from where your previous forecasts didn’t match reality, Sue says.
In order to do that, you need to set up a system to easily get the information data from every relevant department. Then, based on that data, Sue says you must be willing to adjust to the reality the forecast reveals, even if it means making a hard decision like closing the business. Make your decision quickly. “Don’t wait too long to get perfect information before you act,” says Sue. “Perfection is fleeting.”
Understand Buyers’ Behavior
Know your buyers’ decision-making process so you can tailor your pipeline management, schedule follow-ups strategically and close the sale. “I need to know about what they care about,” he says. “Anything that will affect their ability or willingness to purchase your product.”
Manage Your Sales Pipeline
Your company’s sales forecast is not just a passive document. To make your forecast a reality, you need strong sales pipeline management — the process from your initial contact with a potential customer until the sale is closed — to ensure that you direct your resources to the right places.
“In a small business, there’s an endless pile of things you could do today,” Sue says. Use your forecast to prioritize. If cash is low, focus on customers who are more likely to make a quick purchase. If sales are on track, invest more time with customers who could become profitable long-term relationships.
Use Sales Forecasting Tools
There are several applications you can use to manage and predict what future business may look like. Sue recommends PeopleSoft and Intuit QuickBooks for managing expenses and asset account balances. Microsoft Excel can be used for financial forecast, which looks at sales, rate trends, cost of goods, etc. A spreadsheet can also help to manage the operational areas of your business such as its inventory, sell-off rates, production limits and raw material limitations.
A forecast should be more than an educated guess at what your sales will be — it should be a tool to guide you on how to act and adjust so you can progress toward meeting your budget. Sue recommends monthly forecasting, but says it ultimately depends on your business. Whatever frequency you decide on, the data sample should be representative of the businesses’ trends. “You have to be nimble enough to do the right thing,” Sue says, “even if it’s not what you expected.”