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Sales forecasts enable you to manage your business more effectively. Before you begin, there are a few questions that may help clarify your position:

• How many new customers do you gain each year?
• How many customers do you lose each year?
• What is the average level of sales you make to each customer?
• Are there particular months where you gain or lose more customers than usual?

Existing businesses

The starting point for your sales forecast is last year's sales.

Before you factor in a new product launch, or an economic trend, look at the level of sales for each customer last year. Do you know of any customers who are going to buy more - or less - from you next year?

In the case of customers who account for a significant value of sales, you may want to ask them if they plan to change their purchase level in the foreseeable future.

New businesses

New businesses have to make assumptions based on market research and realistic judgement.

You could begin by listing the number of customers you think is realistic to achieve in your first year.  Then try to assign a realistic sales figure against each of them.

Bear in mind that a few larger customers are likely to account for a greater share of sales than the rest - although this depends on your type of business. There must inevitably be some guesswork here, but at least you should reach a forecast that is broadly in the right area.

Consider sales volume as well as value

Depending on your type of business, you may want to specify the volume of sales in the forecast - for example, how many five-litre cans of paint you expect to sell. By knowing the volume as well as the value of sales, you can plan what resources you're likely to need in terms of:

• production
• storage
• transport
• staffing

Every year brings new challenges and opportunities. So, it's crucial to consider any changes that could impact your sales. These factors, known as sales forecast assumptions, form the basis of your sales projection.

Examples of sales forecast assumptions

Sales forecasts assumptions come from analysing past sales data, industry benchmarks, and economic trends. Forecasts are never entirely accurate but, when making one, it's important to be as objective as possible. Make sure to gather the necessary data to input into your forecast model.
These are various examples of sales forecast assumptions:

• Market growth – you expect the market you operate in to grow by 2%.
• Market share – you expect your market share to decrease by 2% due to a competitor's success.
• Sales force expansion – you plan to double your sales team from three to six members halfway through the year. This may expand your outreach and potential sales.
• Advertising budget – you cut the advertising budget by 50%. This may lead to fewer enquiries from potential customers.
• Relocation - you are moving to a better location. This will lead to 30% more customers buying next year.
• Pricing strategy - you are raising prices by 10%. This will cut sales volume by 5% but lift revenue by 4.5%.
• New product launches - a new product range will likely cost more than it earns in the first year. Yet, it is expected to reap the benefits in the future.
• High-potential products - products with the potential for rapid sales growth.
• Established products - products that maintain steady sales with little growth potential.
• Declining products - products whose sales are falling. This could be due to a competitor's better offerings. 

For new businesses, the assumptions need to be based on market research and good judgement.

Start by writing down your sales forecast assumptions.

You can then create your sales forecast. This becomes easy once you have found a way to break the forecast down into individual items.

• Can you break down your sales by product, market, or geographic region?
• Are single customers important to your business? Do they need their own sales forecasts?
• Can you estimate the conversion rate - the percentage chance of the sale happening - for each item on your sales forecast?

How to calculate sales forecast?

For example, you might predict that a customer will buy £1,000 worth of products. If you estimate that there's a 70% chance of this happening, the forecast sales for this customer are £700, ie 70% of £1,000.

Selling more of your product to an existing customer is far easier than making a first sale to a new customer. So, the conversion rates for existing customers are much higher than those for new customers.

You may want to include details of which product each customer is likely to buy. Then you can spot potential problems. One product could sell out, while another might not shift at all.

By predicting specific sales, you're forecasting what you think will be sold. This is generally far more accurate than starting with a target figure and then trying to work out how to achieve it.

The completed sales forecast isn't just used to plan and monitor your sales efforts. It's also a vital part of cashflow management.

There is a wide range of sales forecasting software available that can make the whole process much simpler and more accurate. This software generates forecasts based on historical data. If you are considering buying software, get advice from an IT expert. You can also ask your trade association, your business advisers, or businesses of a similar size and in similar markets.

Sales forecasting is important for business planning. It helps companies predict revenue, allocate resources, and set goals. However, common mistakes can lead to inaccurate forecasts, which can have significant consequences. Here's a guide on avoiding common mistakes.

Avoid overly optimistic sales projections

It's important to maintain a positive outlook but being overly optimistic with your sales forecasting won't benefit your business. It's a good idea to look back at the previous year's forecast to see if your figures were realistic. New businesses should avoid putting the level of sales they need for the business to be viable as the forecast.

Ensure your sales forecast is achievable 

For a realistic sales forecast, you should consider if predicted sales levels are achievable. For example:

• a taxi can only make a certain number of airport trips each day considering factors like travel time, traffic, and breaks for the driver
• a machine can only produce a set number of components on each shift, limited by factors such as the machine's speed, maintenance needs, and operator efficiency
• a sales team can only visit a certain number of customers each week due to constraints like travel time, meeting durations, and preparation for each visit

Use historical sales data for reliable market growth assumptions

When forecasting sales, it's important to use past sales data to make market growth projections more reliable. Otherwise, you may end up with conflicting information. For instance, if you assume a declining market, it's illogical to forecast increased sales. For more information, see sales forecast assumptions.

Agree on forecast timelines

It's advisable to set a specific timeline to finalise and agree on the forecast. Spending too much time refining your forecast can distract you from focusing on your targets. Aim to minimise adjustments, regardless of whether the forecast appears overly optimistic or pessimistic.

Engage with your team for collaborative forecasting

If you have a dedicated sales team, they will offer insights into customer buying plans. Collaborate with them for more accurate sales projections:

• ask for their opinions
• give them time to ask their customers about this
• get the sales team's agreement to any targets they will be set 

Leverage feedback to refine sales forecasts

Once you've developed your sales forecast, it's important to have it reviewed by someone experienced. Consider asking an accountant or a senior sales representative, to review the whole document. Their feedback can help identify any overlooked factors or potential improvements ensuring accurate and reliable forecasts.

You can create an informed sales plan once you have finalised your sales forecast. The questions your sales plan should answer include:

• What are you going to focus on?
• What are you going to change?
• In practical terms, what steps are involved?
• What territories and targets are you going to give each salesperson or team?

The sales plan will start with some strategic objectives. Here are some examples:

• break into the local authority market by adapting your product for this market
• open a shop in an area that you believe has the potential for generating lots of sales
• boost the average sale per customer

You can then explain the stepping stones to achieving these objectives. When setting targets for your business, use SMART objectives These are specific, measurable, achievable, realistic, and time-bound. 

Look at the example of breaking into the local authority market. Your stepping stones might be to:

• hire a sales person with experience of the local authority market on a basic salary of £24,000 by the beginning of February
• fully train the sales person by mid-April
• ensure that any changes the product development team has agreed to make are ready to pilot by the beginning of April

As well as planning for new products and new markets, explain how you propose to improve sales and profit margins for your existing products and markets.

It is often helpful to identify how you could remove barriers to sales by:

• Increasing the activity levels of the sales team - more telephone calls per day, or more customer visits per week?
• Increasing the conversion rate of calls into sales - through better sales training, better sales 91Ï㽶»ÆÉ«ÊÓƵ materials or improved sales incentives?