How to do a Sales Forecast: The Exponential Smoothing Technique. Set a process. You really can’t get this wrong. No matter how you forecast, there is one thing that makes or breaks it for most companies — consistency. Editor’s note: This article was originally published in March 2016, and was updated in August 2020. But beyond just setting the stage for a complete financial forecast, your sales forecast is really all about setting goals for your company. Typically this is done by: Making a list of the goods and services to be sold. Susan Ward wrote about small businesses for The Balance Small Business for 18 years. If you estimate that there's a 70 per cent chance of this happening, the forecast sales for this customer are $700, i.e. uncertainties in their forecast. Just like the name suggests, bottom-up forecasting is more of an educated guess, starting at the bottom and working up to a forecast. To forecast by units, you predict how many units you’re going to sell each month—using the bottom-up method of course. You shouldn’t just look at your accounting system, though. Generally, the two periods are also of a corresponding length. A demand forecast looks at sales data from the past to determine the consumer demand in the future. Thus we can define sales forecasting as, estimation of type, quantity and quality of future sales. What’s driving those sales? Then, you calculate a sales forecast using the following formula: Expected revenue = Deal amount x Probability Let’s say, you are nurturing a lead toward a $100,000 deal, and the probability of closing it is already 60%. This way, your business numbers drive your strategy. Sales forecasting done on a month by month basis will give you a much more realistic prediction of how your business will perform than one “lump” sales forecast for the year. Create two columns, 3-month moving averages and 5-month moving averages. See Three Methods of Sales Forecasting and Sales Forecasting for Your Business Plan for further explanation. Also, there’s another benefit: At the end of a month of sales, I can look back at my forecast and see how I did compared to the forecast in greater detail. Let’s dive right in and figure it out. So, my advice is always to just take a deep breath and relax. With a sales forecast, you get a detailed prediction of what an individual salesperson, sales team, or your entire organization, will sell in a given time period—weekly, monthly, or annually. I really recommend try recurrent neural networks to forecast, my tip is just use much more data. Are you exceeding your goals? So, instead of forecasting “from the top-down,” do a “bottom-up” forecast. First off you are going to need the right software to do the forecast. I recommend that you forecast monthly for 12 months into the future and then just develop an annual sales forecast for another three to five years. to automatically compare your forecast to your numbers from your accounting system—no cutting and pasting or complicated spreadsheets required. You would be comparing an earlier period of lower sales with a later one of higher sales. A sales forecast is a prediction of future sales revenue. Also, there’s another benefit: At the end of a month of sales, I can look back at my forecast and see how I did compared to the forecast in greater detail. As you learn more about your business and your customers, you can change and adjust your forecast. A sales forecast period can be monthly, quarterly, half-annually, or annually. Tools like LivePlan can help with this. An accurate demand forecast will help you avoid high cost operations, poor customer service, and product shortages. An hour of consulting work is also a unit. Your sales forecast is the foundation of the financial story that you are creating for your business. Year? Instead, smart businesses use their sales forecast to measure their progress and ensure that they’re on the right track. A chart will also highlight potentially unreasonable guesses at your sales growth. You first need to build the numbers using a bottom-up approach and then sanity check them using a top-down approach. When you sit down to fill out your sales forecast template, you need to know: A). If you only have a few months of data, use it to estimate the next 30 days or so. After all, the world is going to change, your business is going to change, and you’ll be updating your forecast to reflect those changes. It’ll be much easier and make you richer!). How to forecast sales by LivePlan.Forecasting sales can seem intimidating. For example, if your forecast indicates a 30% increase in sales of products or services, you may wish to begin searching for larger business premises and hire additional staff to meet the demand. The process of preparing a sales forecast for a new business involves researching your target market, your trading area and your competition and analyzing your research to guesstimate your future sales. Then, you figure out what the average price is going to be for each unit. Sales growth is the percent growth in the net sales of a business from one fiscal period to another. For example, unit sales of 36 new bicycles in March multiplied by $500 average revenue per bicycle means an estimated $18,000 of sales for new bicycles for that month. Their sales forecast becomes a management tool that helps them run their business better. Finally here we have the sales forecasting for the next 12 months! The first step of the analysis is to study the data set, which contains the sales information from the drug store. If you are not familiar with these 2 methods of building financial estimates, these are explained in details in our article on how to do a market for a business plan. A sales forecast is an estimate and assessment about how to manage the future cash flow (regarding how money is going to come in and out). The sales forecasting process is a critical one for most businesses. New entrepreneurs frequently ask me for advice about. The first step to proper Sales Forecasting is to know the things that fall within your domain directly as a salesperson. Conversely, a forecast of shortfalls in sales can allow you to mitigate the effect by taking advance measures such as reducing expenses or reorienting your marketing efforts. It’s an intimidating task, looking into the future. More than ten is going to be a lot of work to forecast and fewer than three probably means that you haven’t divided things up quite enough. Here we changed some sales value figure to get the accurate forecasting result as shown below. The sales forecast forms a basis for production targets. A single lunch at a restaurant would be a unit. You should compare the numbers from your accounting software to your forecast and see if you’re on track. Update your forecast with the actual values as time progresses. $100? My final word of advice is to make sure that you graph your monthly sales with a chart. This level of detail helps you. Tools like LivePlan can help with this. Without a solid idea of what your future sales are going to be, you can’t manage your inventory or your cash flow or plan for growth. This method is particularly useful if the new product is a variation on an existing one involving, for example, a different colour, size or flavour. The further your forecast into the future, the less you’re going to know and the less benefit it’s going to have for you. The word “unit” is just a generic way to talk about whatever it is that you are selling. Your sales forecast is also your guide to how much you should be spending. $100? There are many factors that can potentially affect sales that should form the basis for your sales forecast, including: Sales forecasting for an established business is easier than sales forecasting for a new business; the established business already has a sales forecast baseline of past sales. to guess here, and the best way to refine your guess is to, go out and talk to your potential customers and interview them. Of the people you can reach, how many do you think you’ll be able to bring in the door or get onto your website? Sales had its definition of sales qualified leads, but too often their quality was insufficient to close enough business to hit the forecast. Their sales forecast becomes a management tool that helps them run their business better. Assuming you want to run a profitable business, you’ll use your sales forecast to guide what you should be spending on marketing to acquire new customers and how much you should be spending on operations and administration. A sales forecast can help executives with sales planning. 2. 12 months from now is far enough into the future to guess. Total Unit Sales is the sum of the projected units for each of the five categories of sales. (If you do happen to be able to see into the future, please just skip the whole startup thing and go play the stock market. Some forecast by product lines, and some forecast new business and churn. Sales forecasts are usually based on historical data, industry trends, and the status of the current sales pipeline. After creating an initial forecast using your best estimates create another forecast based on  optimistic numbers and another based on pessimistic ones. Just pick a few to get started and move on. It’s easier to think about sales this way rather than to think just in dollars (or yen, or pounds, or rand, etc.). For example, if you plan on selling 1,000 units at $20 each, you’ll make $20,000. A sales forecast is an estimate of the quantity of goods and services you can realistically sell over the forecast period, the cost of the goods and services, and the estimated profit. If your business has repeat customers, you can check with them to see if their purchase levels are likely to continue in future. Whatever your particular business might be, look for comparable companies and use their average historical sales figures to lay the basis for your firm's sales forecast. They forecast “from the top down.” What that means is that they figure out the total size of the market (. ) A “unit” is simply a stand-in for whatever it is that you are selling. You’re looking to answer questions like: Your sales forecast will help you answer all of these questions and potentially any others that involve the future of your business. Now that’s out of the way, let’s talk about why you should forecast by units. Sales Forecast Template for Startup Business. The purpose of sales forecasting is to provide information that you can use to make intelligent business decisions. All rights reserved. pagespeed.deferIframe.convertToIframe(); When you’re forecasting your sales, the first thing you should do is figure out what you should create a forecast for. While a sales forecast is always a moving target, most organizations typically under-forecast or over-forecast; both of which lead to problems. You shouldn’t just look at your accounting system, though. This becomes easy once you've found a way to break the forecast down into individual items.For example, you might predict that a customer will purchase $1,000 worth of products. For a 12-month analysis, it is best to have at least three years of data to establish seasonality trends. Key decisions that are derived from a sales forecast include: 1. Being able to see the time and date of orders, SKU(s) ordered, and sales channel will help you forecast growth and trend projection on a more granular level and look back to see how your forecasts matched up to reality. To perform a moving average forecast, the revenue data should be placed in the vertical column. pagespeed.deferIframeInit(); She has run an IT consulting firm and designed and presented courses on how to promote small businesses. You should compare the numbers from your accounting software to your forecast and see if you’re on track. You’ll be surprised how accurate a number you can get with a few simple interviews. . These entrepreneurs are always optimistic about the future of their new company, but when it comes to talking about the details, most aren’t sure how to predict future sales and how much money they’re going to make. Businesses are forced to look well ahead in order to plan their investments, launch new products, decide when to close or withdraw products and so on. Once you have your sales forecast complete, you’ll be able to easily create your, But beyond just setting the stage for a complete financial forecast, your sales forecast is really all about. to guess here, and the best way to refine your guess is to go out and talk to your potential customers and interview them. The hard part comes in projecting how much of each of your items/services you are going to sell. This means that an accurate sales forecast can help salespeople to … allow you to spot potential issues while there's still time to avoid or mitigate To start, identify the objective. How to Forecast Sales Method #1 . With an accurate demand forecast, you will have operations that are more efficient, better customer service, and a reduced lead time on manufacturing products. If you’re starting a clothing shop, forecast the key categories of clothing that you sell, like outerwear, casual wear, and so on. Also, if you are using historical, extrapolated data with the idea of choosing one of the suggested quantitative forecasting techniques then there are a couple of things to watch out for. The math for a sales forecast is simple. Since a sales forecast ideally attempts to identify when, where, and how your customers buy your product, it makes sense that understanding customer segments and buyer behaviour is an important part of forecasting accurately. . Before they have much historical sales data, lots of startups make this mistake—and it’s a big one. Multiply units times prices to calculate sales. The last step of the bottom-up forecasting method is to think about the average amount that each of those 100 people in our example ends up spending. But, you’ll eventually need your expenses to be less than your sales in order to turn a profit. With a dollar-based forecast, you are only thinking about the total amount of money that you’ll make in a given month, rather than the details of the number of units that you are selling and the average price you are selling each unit for. Multiply those two numbers together and you have the total sales you plan on making each month. You’re as well equipped as everyone else to put together a credible, reasonably accurate forecast. What is the purpose of your analysis? You should also pay close attention to ecommerce returns, which can be costly. If your business has a huge number of items in inventory it may be necessary to condense unit sales/costs into categories. LivePlan uses a smart dashboard to automatically compare your forecast to your numbers from your accounting system—no cutting and pasting or complicated spreadsheets required. How much will each customer hopefully spend with your company? ©2010-2021 Palo Alto Software. The problem is that this kind of guessing is not based on any kind of reality. Sale forecasting is an integral part of business management. If for example, you show a big jump in sales from one month to the next, you should be able to back this up with a strategy that’s going to deliver those sales. This level of detail helps you guide your business and grow it moving forward. First, establish the timeline. Of the people that find out about the new company, how many are going to buy? You know your customers, and you know your market, so you can forecast your sales. Business accounting software packages such as QuickBooks can perform sales forecasts, including individual forecasts, by customer, based on existing sales data. You’re looking to answer questions like: What do you hope to achieve in the next month? You don’t want want to be too generic and just forecast sales for your entire company. It gives you a picture of a future you can then build off of. Your forecast is just your best guess at what’s going to happen. The next time series chart shows the number of sales by month. Sales Forecasting for Existing Businesses, Accounting Software Makes Forecasting Easier, 3 Sales Forecasting Methods and Why You Should Use All Three, Sales Forecasting Tips for Small Business Owners, How to Do a Breakeven Analysis to Find Your Profit Point, Here's What Your Coffee Shop Business Plan Should Look Like, Use This Template to Write a Simple Business Plan, The 8 Best Accounting Software for Small Business, 5 Mistakes to Avoid When Selling Your Small Business, The 8 Best Accounting Software for Restaurants in 2021, Use Target Marketing and Market Segmentation to Improve Your Bottom Line, The Art and Science of Financial Projections, The 8 Best Accounting Software for Contractors of 2021, The 6 Best Construction Accounting Software of 2021, The Balance Small Business is part of the, 6 Advantages of Using Small Business Accounting Software, Before You Buy Accounting Software for Your Small Business, The Best Accounting Software for Small Business, Making a list of the goods and services to be sold, Estimating of the number of each to be sold, Multiplying the unit price by the estimated number of goods or services to be sold, Determining the cost of each good or service, Multiplying the cost of each good or service by the estimated number to be sold, Subtracting total cost from the total sales. Next, gather the data based o… When creating a forecast, the salesperson will look at each opportunity and identify: The stage the prospect is in; How likely they are to close; The value of that opportunity; To be successful, the sales rep needs to understand the average sales cycle and have a clear outline of each stage of the sales process to make a reasonable prediction. And finally, of the people that come in the door, get on the phone, or visit your site, how many will buy? It’s not set in stone. On the other hand, you don’t want to create a forecast for every individual product or service that you sell. And don’t forget, all forecasts are wrong—and that’s O.K. This is what you want before conducting a sales forecast. For example, if you’re starting a restaurant, you don’t want to create forecasts for each item on the menu. How many customers do you hope to have next month and next year? These entrepreneurs are always optimistic about the future of their new company, but when it comes to talking about the details, most aren’t sure how to predict future sales and how much money they’re going to make. Just remember that sales forecasting doesn’t have to be hard. Start by thinking about how many potential customers you might be able to make contact with; this could be through advertising, sales calls, or other marketing methods. What is a Sales Forecast? So for example the $18,150 shown for October of 2020 is the product of 33 units times $550 each. Start by thinking about how many potential customers you might be able to make contact with; this could be through advertising, sales calls, or other marketing methods. See 6 Advantages of Using Small Business Accounting Software, Before You Buy Accounting Software for Your Small Business, and The Best Accounting Software for Small Business. If for example, you show a big jump in sales from one month to the next, you should be able to back this up with a strategy that’s going to deliver those sales. the first thing you should do is figure out what you should create a forecast for. Tips and guidance to help you grow a better, smarter business. Or did I sell for a higher price than I thought I would? How are people finding out about this new smartphone company? Businesses use the sales forecast to estimate weekly, monthly, quarterly, and annual sales totals. On the other hand, you don’t want to create a forecast for every individual product or service that you sell. pagespeed.lazyLoadImages.overrideAttributeFunctions();hbspt.cta.load(467363,'0dceef66-616e-47ae-b3bb-34ad804f5612',{}); Let’s start by talking about “unit” sales. On average, do they spend $20? If you don't wish to contact them directly you can infer future activity based on the health of the customer industry. This is your SOM (your “share of the market”), the subset of your 1 percent of the market that you will realistically reach—particularly in the first few years of your business. The easiest way to convert your sales forecast into a management tool is to have a. where you look at your business’s finances. to see how your sales might dip during a slow period of the year and then grow again during your peak season. Estimating of the number of each to be sold. This is your target market. Building a sales forecast is a double exercise. Before they have much historical sales data, lots of startups make this mistake—and it’s a big one. Did I meet my goals because I sold more units? A chart will also highlight potentially unreasonable guesses at your sales growth. A chart will make it easy to see how your sales might dip during a slow period of the year and then grow again during your peak season. This is your, 1,000 people click from the ad to my website, The last step of the bottom-up forecasting method is to think about the average amount that each of those 100 people in our example ends up spending. But, you’ll eventually need your expenses to be less than your sales in order to. [CDATA[ Are you looking to predict the next 12 months, the next five years, or the next 30 days? Plus, it’s easy to print or create PDF financial reports with the right level of detail to share with your team. After all, 1 percent is such a tiny little number, it’s got to be believable, right? Anyone can do it and you, as an entrepreneur, are the most qualified to do it for your business. You’ll be surprised how accurate a number you can get with a few simple interviews. After all, it’s just forecasting and you can always come back and adjust your categories later. Promotional mix 3. Then, the number of sales decreases until December, when it … You shouldn’t just look at your accounting system, though. This is your SOM (your “share of the market”), the subset of your 1 percent of the market that you will realistically reach—particularly in the first few years of your business. A sales forecast is an estimate of the quantity of goods and services you can realistically sell over the forecast period, the cost of the goods and services, and the estimated profit. // This way, the expected revenue which you may include in your forecasting is 100,000 x 0.6 = $60,000. Now, you don’t always need to be profitable, especially if you are trying to expand aggressively. The idea when building a financial forecast is to decompose the figure in a set of measurable sub-hypothesis. It’s O.K. Then gather data and run a forecasting model. Your sales forecast in a business plan should show sales by month for the next 12 months--at least--and then by year for the following two to five years. The easiest way to convert your sales forecast into a management tool is to have a monthly financial review meeting where you look at your business’s finances. Under-forecasting. Once you have your sales forecast complete, you’ll be able to easily create your profit and loss statement, cash flow statement, and balance sheet. Forecast based on sales of existing products The most common forecasting method is to use sales volumes of existing products to forecast demand for a new one. What if I raise or lower my prices? Your sales forecast isn’t done when you start sharing it with lenders and investors. Business planning, cash forecasting, and financial performance tracking for small businesses and startups. 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