This factsheet outlines the importance of sales forecasting and the factors to consider when trying to forecast future sales.
It explains how to prepare a forecast and suggests how pricing strategies can impact on the forecast. It also provides a checklist on how to avoid pitfalls when forecasting and contains hints and tips and sources of further information.
What is a sales forecast?
A sales forecast is a financial projection of the amount of revenue a business will generate from the sales of its products or services. Sales forecasting is not an exact science, but is a balance between:
- Facts that can be gleaned from market research, or previous sales figures, such as how often customers might buy a product or service and what they will pay for it.
- Judgement of market conditions and other uncontrollable factors that may affect a business, such as the economic and political climate, seasonal factors or trends.
A sales forecast can stand alone, but it should be closely connected with a sales and marketing plan. It is an integral and fundamental part of the business planning process, as it is central to the projections that are included in profit and loss and cash flow forecasts.
Why is it necessary to forecast sales?
Forecasting sales is necessary for a number of reasons:
- Cash flow management. This is central to the success of a business, so it is essential to understand how sales forecasting affects the cash flow forecast.
- Planning future resource requirements. A sales forecast can help predict the number of staff needed to produce the necessary products to meet demand or to provide a certain level of service.
- Planning purchasing, production and marketing activities. A sales forecast will help plan for peaks and troughs in demand, and the financial and marketing strategies that will be needed to deal with these. For a start-up business, the sales forecasts that are produced as a result of market research will help to establish whether the business idea is financially viable.
If a business is already trading, its sales forecast and ongoing market research will help to plan for future growth. A sales forecast should indicate expected sales by month. For a start-up business, the sales forecast may cover up to three years so that it can be added to the business plan. For an existing business, the sales forecast will usually cover at least the next 12 months.
Factors to consider when preparing a sales forecast
It is important to ask the following questions when forecasting sales:
- Is there an established market for the product or service?
- What is the size of the market?
- Is the market growing or declining, and if so, by what percentage each year?
- What factors are currently influencing that market?
- What may influence the market in the future?
- How might seasonal factors affect sales of the product or service?
- What trends or fashions are relevant to the sector?
- Is it clear who the customers for the product or service will be?
- Realistically, how many of these customers will actually buy the product or service?
- Do you have detailed customer knowledge to help you determine your strategy on any
- issues that will affect your pricing policy and sales forecasts?