sales forecasting
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Sales forecasting is not about foreseeing the future or knowing everything that will happen in your business for any given year. But sales forecasting is about having a plan.

As the old saying goes “Failure to prepare, is preparing to fail”.

Sales forecasting is not the same as having sales goals. Though sales goals are nice and fluffy, and lovely, and you just want o to squeeze, and squeeze them, and just love them, they tend to lean closer to fantasy.

They’re things that you hope to achieve.

Sales forecasting tries to rely less on hope and more on facts and data.

Your sales forecast is the foundation of the financial story that you are creating for your business. 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.

But beyond just setting the stage for a complete financial forecast, your sales forecast is really all about setting goals for your company. You’re looking to answer questions like:

  • What do you hope to achieve in the next month? Year? 5-years?
  • How many customers do you hope to have next month and next year?
  • How much will each customer hopefully spend with your company?

Your sales forecast will help you answer all of these questions and potentially any others that involve the future of your business.

How to use your sales forecast for budgeting

Your sales forecast is also your guide to how much you should be spending. 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.

Now, you don’t always need to be profitable, especially if you are trying to expand aggressively. But, you’ll eventually need your expenses to be less than your sales in order to turn a profit.

Check out this video for a quick overview of how to forecast sales:

How detailed should your forecast be?

When you’re forecasting your sales, the first thing you should do is figure out what you should create a forecast for. You don’t want want to be too generic and just forecast sales for your entire company. On the other hand, you don’t want to create a forecast for every individual product or service that you sell.

For example, if you’re starting a restaurant, you don’t want to create forecasts for each item on the menu. Instead, you should focus on broader categories like lunch, dinner, and drinks. If you’re starting a clothing shop, forecast the key categories of clothing that you sell, like outerwear, casual wear, and so on.

You’ll probably want between three to ten categories covering the types of sales that you do. 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.

You really can’t get this wrong. After all, it’s just forecasting and you can always come back and adjust your categories later. Just pick a few to get started and move on.

Top-down vs bottom-up — which forecasting model is best?

Before they have much historical sales data, lots of startups make this mistake—and it’s a big one. They forecast “from the top down.” What that means is that they figure out the total size of the market (TAM, or total addressable market) and then decide that they will capture a small percentage of that total market.

For example, in 2015, more than 1.4 billion smartphones were sold worldwide. It’s pretty tempting for a startup to say that they’re going to get 1 percent of that total market. After all, 1 percent is such a tiny little number, it’s got to be believable, right?

The problem is that this kind of guessing is not based on any kind of reality. Sure, it looks like it might be credible on the surface, but you have to dig deeper. What’s driving those sales? How are people finding out about this new smartphone company? Of the people that find out about the new company, how many are going to buy?

So, instead of forecasting “from the top-down,” do a “bottom-up” 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.

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. 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. This is your target market.

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? And finally, of the people that come in the door, get on the phone, or visit your site, how many will buy?

Here’s an example:

  • 10,000 people see my company’s ad online
  • 1,000 people click from the ad to my website
  • 100 people end up making a purchase

Obviously, these are all nice round numbers, but it should give you an idea of how bottom-up forecasting works.

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. On average, do they spend $20? $100? It’s O.K. to guess here, and the best way to refine your guess is to go out and talk to your potential customers and interview them. You’ll be surprised how accurate a number you can get with a few simple interviews.

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Should you forecast in units or dollars?

Let’s start by talking about “unit” sales.

A “unit” is simply a stand-in for whatever it is that you are selling. A single lunch at a restaurant would be a unit. An hour of consulting work is also a unit. The word “unit” is just a generic way to talk about whatever it is that you are selling.

Now that’s out of the way, let’s talk about why you should forecast by units.

Units help you think about the number of products, hours, meals, and so on, that you are selling. It’s easier to think about sales this way rather than to think just in dollars (or yen, or pounds, or rand, etc.).

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.

To forecast by units, you predict how many units you’re going to sell each month—using the bottom-up method of course. Then, you figure out what the average price is going to be for each unit. Multiply those two numbers together and you have the total sales you plan on making each month.

For example, if you plan on selling 1,000 units at $20 each, you’ll make $20,000.

 

via How to Forecast Sales for Your Business the Right Way

How to Forecast Sales

Method #1

For a retail business with a brick-and-mortar location, for example, what is the average sales volume per square foot for similar stores in similar locations and similar size? 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.

This isn’t the final answer for adequate sales forecasting, since the comparable company sales figure represents an established business, and a new business won’t hit that target for perhaps a year. But this approach is far more scientific than something like a general two 2 percent figure based on local household incomes.

Method #2

For your specific location, how many households needing your goods live within say, one mile? How much will they spend on these items annually, and what percentage of their spending will you get, compared to your competitors? Do the same analysis for areas within five miles, using lower sales forecast figures, using distances that make sense for your location. For example:

Distance #Households Annual Spending % of Spending Forecasted Sales
1 Mile 20 $5,000 5% ($250) $5,000
5 Miles 500 $5,000 2% ($100) $50,000
Acme Corp Sales Forecast

Method #3

If your business offers, for instance, three types of goods plus two types of extra cost services, estimate sales revenues for each of the five product/service lines. Make an estimate of where you think you’ll be in six months (such as “we should be selling five of these items a day, plus three of these, plus two of these”) and calculate the gross sales per day. Then multiply by 30 for the month.

Now scale proportionately from month one to month six; that is, build up from no sales (or few sales) in the first month to your six-month forecasted sales level. For example:

Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 5 $7,500
Hot Tub 2 $2500 2 $5,000
Hot Tub 3 $3000 2 $6,000
Service $200 10 $3,000
Installation $800 5 $4,000
Total $25,500
Bubbles Corp Sales Forecast – Month 1
Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 8 $12,000
Hot Tub 2 $2500 4 $10,000
Hot Tub 3 $3000 4 $12,000
Service $200 15 $3,000
Installation $800 8 $6,400
Total $43,400
Bubbles Corp Sales Forecast – Month 2
Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 10 $15,000
Hot Tub 2 $2500 5 $12,500
Hot Tub 3 $3000 5 $15,000
Service $200 20 $4,000
Installation $800 10 $8,000
Total $54,500
Bubbles Corp Sales Forecast – Month 3
Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 13 $19,500
Hot Tub 2 $2500 7 $17,500
Hot Tub 3 $3000 7 $21,000
Service $200 25 $5,000
Installation $800 12 $9,600
Total $72,600
Bubbles Corp Sales Forecast – Month 4
Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 18 $27,000
Hot Tub 2 $2500 8 $20,000
Hot Tub 3 $3000 8 $24,000
Service $200 30 $6,000
Installation $800 15 $12,000
Total $89,000
Bubbles Corp Sales Forecast – Month 5
Item Unit Price Month’s Sales Month’s Revenue
Hot Tub 1 $1500 20 $30,000
Hot Tub 2 $2500 10 $25,000
Hot Tub 3 $3000 10 $30,000
Service $200 40 $8,000
Installation $800 20 $16,000
Total $109,000
Bubbles Corp Sales Forecast – Month 6

Now carry the forecast out from months six through 12 for a complete annual forecast.

Don’t Just Do One Sales Forecast

Instead of forecasting annual sales as a single figure, use one or two of the sales forecasting methods above and generate three figures: pessimistic, optimistic, and realistic.

Work with figures on a monthly basis, since depending on your business, there could be huge variations by month due to various factors, including seasonality. Some retail firms do 50 percent of their gross sales around Christmas, from the end of October to the end of December, and barely get by from June through August of each year.

Estimate Your Costs

A sales forecast should also include the firm’s direct costs so that profits can be estimated, for example:

Item Unit Cost Shipping Month’s Sales Month’s Cost
Hot Tub 1 $500 $100 5 $3,000
Hot Tub 2 $1000 $100 2 $2,200
Hot Tub 3 $1200 $100 2 $2,600
Service Cost $80 10 $800
Installation Cost $200 5 $1,000
Total Direct Cost $9,600
Bubbles Corp Expenses – Month 1

Direct costs vary by product, business, and industry:

  • For a reseller of goods, the direct cost of each item sold (also known as the cost of goods sold or COGS) is typically the wholesale price (plus shipping if applicable)
  • For a manufacturer, direct costs include raw materials, labor, etc.
  • For a service business, the direct costs are mainly salaries and expenses

Put in your expenses by month, including big purchases by season (or however you buy materials/goods). Remember, you may buy materials or inventory in say, July, for Christmas, yet not get all of your receipts until 45 days after Christmas. There can be big cash flow implications. Also, will you be buying vehicles? Capital equipment? Make sure to show depreciation expense. If significant, other items such as bad debts and credit card interest and other expenses for items purchased by credit card can also be included.

Taking a Sales Forecast to the Bank

If you’re going to a bank for financing, be prepared to answer questions such as:

  • Have you made an allowance for a reserve cash account, for your slow months, but also in case you have to quickly replace a vehicle or equipment?
  • You intend to charge x dollars for your product, but how do you respond if your competition cuts the price by 33 percent and still makes a profit?
  • How will you grow your business specifically? By selling more to existing customers, selling existing products to new customers, selling new products to existing customers and selling new products in order to attract new customers? Potential lenders are going to want to see if you’ve got a real, in-depth plan for any negative issues that could impact sales.

Remember that it is acceptable (and realistic) to have a negative cash flow projection for the early months of your cash flow projection period.

Good Decisions Depend on Good Information

Instead of estimating one sales figure for the whole year when sales forecasting, a more realistic monthly schedule of income and expenses gives you far more information on which to base decisions. As your business gets off the ground, keeping the books will give you additional information to refine your future sales forecasts.

It’s important to prepare three cash flow projections, where you vary the percentage of sales or other figures to arrive at three different scenarios: pessimistic, optimistic, and realistic. The pessimistic view should be the worst-case situation and needs to illustrate your plan to have enough capital and patience to get through that scenario. If it turns out that the actual results are better than that, you’re in great shape!

via 3 Sales Forecasting Methods – The Balance Small Business

1. Jury of Executive Opinion:

This method of sales forecasting is the oldest. One or more of the executives, who are experienced and have good knowledge of the market factors make out the expected sales. The executives are responsible while forecasting sales figures through estimates and experiences. All the factors-internal and external—are taken into account. This is a type of committee approach. This method is simple as experiences and judgement are pooled together in taking a sales forecast figure. If there are many executives, their estimates are averaged in drawing the sales forecast.

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Merits:

(a) This method is simple and quick.

(b) Detailed data are not needed.

(c) There is economy.

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Demerits:

(a) It is not based on factual data.

(b) It is difficult to draw a final decision.

(c) More or less, the method rests on guess-work, and may lead to wrong forecasts.

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(d) It is difficult to break down the forecasts into products, markets, etc.

2. Sales Force Opinion:

Under this method, salesmen, or intermediaries are required to make out an estimate sales in their respective territories for a given period. Salesmen are in close touch with the consumers and possess good knowledge about the future demand trend. Thus all the sales force estimates are processed, integrated, modified, and a sales volume estimate formed for the whole market, for the given period.

Merits:

(a) Specialized knowledge is utilized.

(b) Salesmen are confident and responsible to meet the quota fixed.

(c) This method facilitates to break down in terms of products, territories, customers, salesmen etc.

Demerits:

(a) Success depends upon the competency of salesmen.

(b) A broad outlook is absent.

(c) The estimation may be unattainable or may to too low for the forecasts as the salesmen may be optimistic or pessimistic.

3. Test Marketing Result:

Under the market test method, products are introduced in a limited geographical area and the result is studied. Taking this result as a base, sales forecast is made. This test is conducted as a sample on pre-test basis in order to understand the market response.

Merits:

(a) The system is reliable as forecast is based on actual result.

(b) Management can understand the defects and take steps to rectify.

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(c) It is good for introducing new products, in a new territory etc.

Demerits:

(a) All the markets are not homogeneous. But study is made on the basis of a part of a market.

(b) It is a time-consuming process.

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(c) It is costly.

4. Consumers’ Buying Plan:

Consumers, as a source of information, are approached to know their likely purchases during the period under a given set of conditions. This method is suitable when there are few customers. This type of forecasting is generally adopted for industrial goods. It is suitable for industries, which produce costly goods to a limited number of buyers- wholesalers, retailers, potential consumers etc. A survey is conducted on face to face basis or survey method. It is because changes are constant while buyer behaviour and buying decisions change frequently.

Merits:

(a) First hand information is possible.

(b) User’s intention is known.

Demerits:

(a) Customer’s expectation cannot be measured exactly.

(b) It is difficult to identify actual buyers.

(c) It is good when users are few, but not practicable when consumers are many.

(d) Long run forecasting is not possible.

(e) The system is costly.

(f) Buyers may change their buying decisions.

5. Market Factor Analysis:

A company’s sales may depend on the behaviour of certain market factors. The principal factors which affect the sales may be determined. By studying the behaviours of the factors, forecasting should be made. Correlation is the statistical analysis which analyses the degree of extent to which two variables fluctuate with reference to each other.

The word ‘relationship’ is of importance and indicates that there is some connection between the variables under observation. In the same way, regression analysis is a statistical device, which helps us to estimate or predict the unknown values of one variable from the known values of another variable.

For instance, you publish a text book on “Banking”, affiliated to different universities. The permitted intake capacity of each and the medium through which the students are taught are known. Is it a compulsory or an optional subject? By getting all these details and also by considering the sales activities of promotional work, you may be able to declare the probable copies to be printed.

The key to the successful use of this method lies in the selection of the appropriate market factors. Minimizing the number of market factors is also important. Thus the demand decision makers have to consider price, competitions, advertising, disposal income, buying habits, consumption habits, consumer price index, change in population etc.

Merits:

(a) It is a sound method.

(b) Market factor is analysed in detail.

Demerits:

(a) It is costly.

(b) It is time-consuming.

(c) It is a short run process.

6. Expert Opinion:

Many types of consultancy agencies have entered into the field of sales. The consultancy agency has specialized experts in the respective field. This includes dealers, trade associations etc. They may conduct market researches and possess ready-made statistical data. Firms may make use of the opinions of such experts. These opinions may be carefully analysed by the company and a sound forecasting is made.

Merits:

(a) Forecasting is quick and inexpensive.

(b) It will be more accurate.

(c) Specialized knowledge is utilized.

Demerits:

(a) It may not be reliable.

(b) The success of forecasting depends upon the competency of experts.

(c) A broad outlook may be lacking.

7. Econometric Model Building:

This is a mathematical approach of study and is an ideal way to forecast sales. This method is more useful for marketing durable goods. It is in the form of equations, which represent a set of relationships among different demand determining market factors. By analyzing the market factors (independent variable) and sales (dependent variable), sales are forecast. This system does not entirely depend upon correlation analysis. It has great scope, but adoption of this method depends upon availability of complete information. The market factors which are more accurate, quick and less costly may be selected for a sound forecasting.

8. Past Sales (Historical method):

Personal judgement of sales forecasting can be beneficially supplemented by the use of statistical and quantitative methods. Past sales are a good basis and on this basis future sales can be formulated and forecast. According to Kirkpatrick, today’s sales activity flows into tomorrow’s sales activities; that is last year’s sales extend into this year’s sales. This approach is adding or deducting a set of percentage to the sales of previous year(s). For new industries and for new products, this method is not suitable.

(a) Simple Sales Percentage:

Under this method, sales forecast is made by adding simply a flat percentage of sales so as to forecast sales as given below:

Next year sales = Present year sales + This year sales/Last year sales

or = Present year sales + 10 or 5% of present sale

(b) Time Series Analysis:

A time series analysis is a statistical method of studying historical data. It involves the isolation of long time trend, cyclical changes, seasonal variations and irregular fluctuations. Past sales figures are taken as a base, analysed and adjusted to future trends. The past records and reports enable us to interpret the information and forecast future trends and trade cycle too.

Merits:

(a) No guess-work creeps in.

(b) The method is simple and inexpensive.

(c) This is an objective method.

Demerits:

(a) ‘Market is dynamic’ is not considered.

(b) No provision is made for upswings and downswings in sales activities.

9. Statistical Methods:

Statistical methods are considered to be superior techniques of sales forecasting, because their reliability is higher than that of other techniques.

They are:

(i) Trend Method

(ii) Graphical Method

(iii) Time-series Method:

(a) Freehand method

(b) Semi-average method

(c) Moving average method

(d) Method of least square

(iv) Correlation method

(v) Regression method.

NB:

The above statistical methods can easily be studies with the help of any statistics book.

Apart from the above, the following factors may also be considered:

1. Availability of raw materials

2. Plant capacity

3. Government policies

4. Buying habits of consumers

5. Fashion changes

6. Distribution system

7. Financial capacity

8. Market competition

9. National income movement

10. Sales promotions.

via Sales Forecasting: Top 9 Methods of Sales Forecasting

 

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