How to Prepare a Sales Forecast
A sales forecast of your product or service is the starting point and the key to preparing financial projections, so it is important to use a realistic estimate.
Most businesses have different types of sales e.g. product lines, departments, customer groups etc. so you’ll eventually need a sales forecast for each main type. I would suggest no more than seven types and perhaps a final one for sundry sales.
Methods of Producing a Forecast
There are numerous methods of producing a sales forecast to get an estimate depending on the stage of your business and the type of business you’re in, here’s a few to be going on with.
- If you have historical annual sales information for your business use that as your starting point for the sales forecast. If you have a number of years then average them, but try and take into account unusual fluctuations e.g. particularly bad weather, economic climate, new products coming on line etc.
- Use information from companies in the same or similar type of business, trade associations, company accounts of similar businesses to give you an idea of the level of sales for your industry and location.
- Use market data and statistics, if you’re in retailing for example its usually possible to get an idea of the typical sales volume per square foot of space for shops in similar locations and sizes. This sales volume multiplied by your average price should give you a sales forecast.
- Use national government demographic data and average spend data to estimate the total market for the product in your area and then calculate your market share by dividing this estimate by the number of competitors plus one in your area. You’ll need to use your own judgment and adjust this figure (probably downwards, for the first year)
- If your in a business with a fixed capacity use a bottom up method by calculating your available capacity (e.g. in a restaurant use the available seating and multiply this by the average meal price), and then estimate a likely usage, say 50% to give a sales forecast for the year.
Avoid wishful thinking, (take 20-30% off the sales forecast figure you first thought of), avoid too much detail in analysing the types of sale you have, and make sure the sales are within your businesses capacity, for example if your manufacturing widgets with a given capacity, there’s no point in sales forecast well above this unless you have plans to expand.
Sales Forecast vs Sales Budget
A sales forecast is an estimate of what a business thinks its sales will be for some future accounting period and is often used as the basis for a business plan financial projection. Its purpose is to enable corrective action to be taken if the business is not going according to plan.
A sales forecast is different from a sales budget. A budget is the sales level the business wants to achieve for the accounting period, it is a target to aim for. In contrast, the forecast is the sales you expect the business to achieve for the accounting period.
For example, a business at the beginning of a year might budget its sales at 100,000 for the year. The 100,000 is the target it hopes to hit, it is what the business is aiming for, and it will set out various plans as to how it can achieve the sales budget. Part way through the year things might not have gone to plan and the business is moving away from its target, it might estimate, based on what it currently knows, that the forecast is only 80,000. Based on this forecast, the business can either take corrective action to bring the business back onto target, or it can amend the target and revise the budget down to 80,000.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.