Whether you’re the owner of a new business or a business that’s been operating for many years, you’ll be able to better manage your business finances by using a tool known as sales forecasting.
In this guide, we’ll explain what sales forecasting is and how you can use this strategy for your own business.
What Is Sales Forecasting?
Simply put, sales forecasting is a tool you can use to estimate your business’s future sales. Depending on your business, there are several different sales forecasting methods with varying degrees of difficulty and time commitment.
Each method has its benefits and drawbacks, with some being more complicated than others. And depending on what data you use, some sales forecasting methods are more accurate than others, so it’s important to fully understand the method you choose when estimating the future sales of your business.
In general, the longer you’ve been in business, the easier it is to get an accurate sales forecast because you have years of historical data to use. But, there are plenty of ways for newly established businesses to use sales forecasting to estimate their future sales, even without any historical data.
Different Methods of Sales Forecasting
As mentioned, there are many different sales forecasting methods to choose from. This guide on the top 10 sales forecasting methods can give you a comprehensive overview of your options, but here are three common ones to get started.
1. Intuitive Sales Forecasting Method
One of the easiest sales forecasting methods to implement is the intuitive sales forecasting method. This sales forecasting method can be a great place to start if your business has minimal historical data.
For this method, you’ll need to talk to your sales reps to get their projections for future sales based on what they’ve seen thus far. While valuable data comes from those who are closest to the actual sales, keep in mind that there is a lot of room for error with this method and proceed with caution. You will likely want to take your sales reps’ opinions into consideration when forecasting future sales, but this should probably not be your only method.
2. Historical Sales Forecasting Method
One of the most popular sales forecasting methods is based on using historical data. The historical sales forecasting method uses data from your past sales to predict future sales.
For example, you might use data from your past three years of April sales to inform what sales will be like next April.
This sales forecasting method is generally reliable as it can help to eliminate bias from seasonal changes. The one drawback of this sales forecasting method is that it doesn’t take into account any broader market changes that your business might experience in the future. However, you can also use this method to help you create a cash flow forecast.
3. Multivariable Sales Forecasting Method
While the previous two sales forecasting methods have been relatively simple, a multivariable sales forecasting method uses a number of variables to estimate your future sales. Potential variables that can be used to estimate future sales include historical sales data, sales rep success rates, sales cycle timing, and demographic information of prospective customers.
By combining a number of data sets with predictive analytics, you can get a highly accurate sales forecast. While this sales forecasting method is more complicated, it can also be more accurate because it takes into account a number of different data sets.
Most businesses that use this type of sales forecasting method also use software to streamline the process.
Variables in Sales Forecasting
While sales forecasting is an important tool in estimating your business’s future sales, it’s also only as accurate as the data you use. There are a number of factors—both internal and external—that could affect your sales that a forecasting model may not be able to foresee. Make sure you’re keeping these in mind—and building in a margin for error—when predicting your future sales.
Industry and Economy
Two of the biggest factors that need to be taken into account when creating your sales forecast are the industry or market that your business operates within, as well as the economy as a whole.
Changes in your market or industry can affect the accuracy of your sales forecast. For example, if your industry is facing new regulations, that uncertainty can cause customers to buy less. Or, if several new competitors come onto the scene, you may see fewer sales as your customers have more options.
The economy also has an effect on your sales forecasting. When the economy is doing well and consumers are confident that it will continue to do so, they are more likely to spend. Conversely, when the economy is declining, consumer spending does as well.
Products and Services
Internally, your sales forecast should take into account any changes you’re making to your products or services. If you’re launching a new product or are going to make a big sales push, you’re going to see changes in your sales. Even a change in packaging can make a difference in sales.
As any business owner knows, marketing plays a huge role in your sales. If you’re using historical sales data to forecast future sales, keep in mind what marketing you did that year. For example, if you had a smaller-than-normal budget, that year’s numbers will be skewed and can affect the accuracy of your sales forecast. Likewise, if you’ll be implementing a huge new marketing strategy in the coming year, you should take this into account when estimating your sales for that time.
Sales Forecasting as a New or Experienced Business
Another major factor to keep in mind when choosing your sales forecasting method is whether you’re a new or experienced business. If you’ve been in business for several years already, you’ll have more sales forecasting methods to choose from, because you can draw on historical data. On the other hand, new businesses will need to look at other options, such as market data.
If you’re an experienced business, you have more types of sales forecasting methods available to you. Typically, sales forecasting for an experienced business is easier because you have concrete numbers from previous years, can identify trends, and have likely weathered some ups and downs.
The most common sales forecasting method to use if you’re an existing business is the historical sales forecasting method. A business’s historical data provides a baseline for any future sales estimates. Combine historical data with economic and industry trends, and you have a pretty accurate sales forecast.
If you’re still learning how to start a business or are in your first year and want to predict your future sales, don’t despair. There are still options to estimate your future sales; however, they may be less accurate and more time-consuming than if you were using your own historical data.
One of the best ways to estimate future sales for a new business is to use data from a similar business. That should be a business that’s within the same industry, that’s about the same physical size, and is located within the same or a similar location. For service businesses or those without a physical location, you can use other demographic data to find a “similar” business.
You can use the historical sales data of a similar business to predict your own future sales. One outside factor that should be taken into account when using this sales forecasting method is that a new business will naturally have lower sales than an established business. So, you should adjust these numbers to get more accurate data for your new business.
Tips to Make Sales Forecasting Easier
If you’re new to sales forecasting, it may seem like a daunting process to collect and use all this data to predict your future sales. Luckily, there are many techniques to make the process a little simpler.
1. Look at a Range
It’s important to keep in mind that forecasts are not going to be 100% accurate. To prepare for a range of possibilities, you should look at different scenarios. For instance, first run your numbers to get the most accurate sales projection you can get. Then, adjust that number up and down by a percentage of sales. This will give you the optimistic, realistic, and pessimistic outlook for your business’s future sales.
Knowing a range of how your business will perform in the future allows you to create your budget and prepare for a variety of outcomes.
2. Know Your Business
The better you know your business and past sales numbers, the easier it will be to predict your future sales.
While human guesswork alone doesn’t make for the most accurate future sales estimate, it is an important aspect of sales forecasting. Even the best software and tools can’t guess if there’s going to be a market change within your industry or if one of your competitors is going out of business. That’s up to you.
When you combine the best sales forecasting tools with human knowledge of the industry and your specific business, you get a much better idea of future figures.
3. Use Accounting and Sales Tracking Software
If you’re tracking sales by hand, you’re making more work for yourself. Sales tracking and accounting software will make the process much easier, plus will benefit you in more ways than just sales forecasting.
Accounting and sales tracking software can keep track of the numbers for you. Plus, many will have sales forecasting algorithms you can use to simplify the process. If not, you can at least export your data and run your own models. Using software can make predicting future sales much easier—and more accurate—than doing it by hand.
The Bottom Line
Sales forecasting will help you better understand your business and make the best decisions to continue to grow in the future. You can’t know what the future will hold exactly, but sales forecasting gives you the best picture of what you can expect. Then, it’s up to you to prepare for external factors and come up with a comprehensive plan for your business.