Without sales forecasts, it’s very difficult to steer the company in the right direction.
You wouldn’t know that the summer is always the slowest season. You wouldn’t pay attention to industry analysts who predict a robust growth in holiday sales, and you’d lose potential customers to the competition. Project Sales forecasting uses past figures to predict short-term or long-term performance. It’s a tricky job, because so many different factors can affect future sales such as: economic downturn, employee turnover, changing trends, increased competition and manufacturer recalls and other factors. But there are several standard methods that can produce consistently accurate sales forecasts from year to year.
The math involved in sales forecasting is actually quite simple. The hard part is maintaining the detailed and accurate financial records needed to make those calculations. Here’s some of the most useful information for calculating sales forecasts;
- Sales numbers for each product broken down by month of the year
- Number of sales that are returned or canceled
- External factors impacting sales–economic forecasts, price changes in raw materials, employee contract renegotiations and increased competition.
The simplest sales forecasting method is an annual sales forecast. Assuming that your sales are relatively stable, there are no major changes in your competition, and your employees or your customer base from year to year, then you only have to account for inflation.
The formula is:
Last Year’s Annual Sales + (Last Year’s Annual Sales X Rate of Inflation) = Next Year’s Sales Forecast
For many businesses, sales fluctuate with the seasons. If that’s the case, then you can break down your sales forecast month by month. The first thing you have to do is analyze the past few years of sales figures to calculate what percentage of the year’s total sales are made each month. In January, for example, you might make 5% of your total annual sales, but in June you make 20%. With that information, you can use current monthly sales numbers to predict the total sales for the year, no matter if it’s the high season or the low season. Of course, it’s rare that a company’s sales remain so stable from year to year, even with seasonal variations. When making sales forecasts, there are several other factors that may need to be added to the calculation:
- Sales contracts that won’t be renewed
- New sales contracts that are on the horizon
- Industry analysts’ predictions for growth or shrinking in your market segment
- Economic analysts’ predictions for the increased or decreased buying power of consumers in your market
- Political changes that could affect government contracts
With an accurate sales forecast in hand, you can plan for the future. If your sales forecast says that during December you make 30% of your yearly sales, then you need to ramp up manufacturing in September to prepare for the rush. One simple sales forecast can inform every other aspect of your business.