Your sales forecast is the backbone of your business plan. People measure a business and its growth by sales, and your sales forecast sets the standard for expenses, profits and potential growth. If you need funding of any sort, any potential lender, (including family and friends) will want to know the upside potential of their investment. You can use sales projections to help answer that question.
Why is sales forecasting important?
Beyond just setting the stage for a complete financial forecast, your sales forecast is really all about setting goals for your company. What do you hope to achieve? 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.
PRO TIP: When it comes to forecasting sales, don’t fall for the trap that says forecasting takes training, mathematics or advanced degrees. Forecasting is mainly educated guessing. So don’t expect to get it perfect, and don’t beat yourself too much if you don’t hit your expectations.
How to start a sales forecasting plan
Your sales forecast in a business plan should show sales by month for the next 12 months–at least–and then by year for the following two to five years. Three years, total, is generally enough for most business plans.
Parts of a sales forecast
Unit Sales: Not all businesses sell by units, but most do, and it’s easier to forecast by breaking things down into their component parts. Product-oriented businesses obviously sell in units, but so do a lot of service businesses. For example, accountants and attorneys sell hours, taxis sell rides, and if you’re a consultant you might charge different monthly retainers depending on what you’re doing.
PRO TIP: If you have a completely new product with no history, find an existing product to use as a guide. For example, if you have the next great computer game, base your forecast on sales of a similar computer game. If you have a new auto accessory, look at sales of other auto accessories. Analysts projected sales of fax machines before they were released to the market by looking at typewriters and copiers.
PRO TIP FOR FOOD BUSINESSES: Let’s say you own a restaurant. Chances are, you sell a lot of different items. You wouldn’t want to project each plate and beverage you sell. Instead, divide the items into categories, such as lunches, dinners, and drinks. These categories are your units.
Creating a sales projection
Once you choose your categories, project how many units you will sell. To forecast sales, multiply the number of units by the price you sell them for. Then create projections for each month.
Here’s an example you can use if you’re a restaurant looking to forecast sales:
But how do you know what numbers to put into your sales forecast?
The math may be simple, but this is predicting the future, and humans don’t do that well. It’s hard, if not impossible to try to guess the future accurately for months in advance, let alone years.
Here’s how to get the ball rolling: use bottom up forecasting. 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 “share of the market” in the first few years of your business. This is also called 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:
- 100,000 people see my company’s ad online
- 10,000 people click from the ad to my website
- 1,000 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.
PRO TIP: Review results every month, and revise your forecast. Your educated guesses become more accurate over time.
Use past results as a guide
If you’ve been open for a little while and already have sales, use results from the recent past if you can. Start a forecast by putting last year’s numbers into this (or next) year’s forecast, and then focus on what might be different and how that could affect your sales numbers.
How to project sales if you have a brand new business
If you don’t have any past sales and are starting from ground zero, use the bottom up method for forecasting and couple that with looking at sales data of your competitors, or similar products. Use how they performed in the last 12 months as a baseline for your own sales growth going forward.
Going back to our new restaurant example, draw a map of tables and chairs and then estimate how many meals can be served per mealtime at capacity. It’s not a random number – it’s actually a matter of how many people come in. Then use the bottom up method to figure out how many people you can get in the door in the next 3, 6, 12, and 18 months.
If you’re forecasting sales for a new mobile app, check out download and sales data from the Apple and Android mobile app stores. Look at average downloads for different apps. Make sure to also search out case studies that might have anecdotal evidence about app sales for your category. Read blog posts and news stories (but take this with a grain of salt – tons of apps use news stories as a way to boost their brand through PR, so it might be a little overstated) about the ramp-up of existing apps that were successful.
Get those numbers and think about how your case might be different, and again use the bottom up method to forecast out the next 3, 6, 12, and 18 months.
A note about expenses
As sales increase, so do the direct expenses that go into your products and services. The more you sell, the more you need to spend to keep up with operations. Direct expenses, also called the cost of goods sold (COGS), affect sales projections. Projected sales and direct expenses help you determine profitability.
Projecting the costs of goods sold is similar to projecting sales. Forecast the number of units you will sell. Then, multiply the number of units by the direct expenses it takes to produce them. For example, you expect to sell 100 units. It costs you $5 to make each unit. You can project to spend $500 in direct expenses.