Forecast and plan your sales

A sales forecast is an essential tool for managing a business of any size. It is a month-by-month prediction of the level of sales you expect to achieve. Most businesses draw up a sales forecast once a year.

Armed with this information you can rapidly identify problems and opportunities – and do something about them.

For example, accurately forecasting your sales and building a sales plan can help you manage your production, staff and financing needs more effectively and possibly avoid unforeseen cashflow problems.

While it’s always wise to expect the unexpected, a well-constructed sales plan, combined with accurate sales forecasting, can allow you to spend more time developing your business rather than responding to day-to-day developments in sales and marketing.

This guide shows you how to put together a sales forecast and a sales plan.

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A basis for sales forecasts

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. List them as ‘New customer 1’, ‘New customer 2’ etc. 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 and staffing.

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Your sales assumptions

Every year is different, so you need to consider any changing circumstances that could significantly affect your sales. These factors – known as the sales forecast assumptions – form the basis of your forecast.

Wherever possible, put a figure against the change – as shown in the examples below. You can then get a feel for the impact it will have on your business. Also, give the reasoning behind each figure, so that other people can comment on whether it’s realistic.

Here are some typical examples of assumptions:

The market

• The market you sell into will grow by 2 per cent.
• Your market share will shrink by 2 per cent, due to the success of a competitor.

Your resources

• You will double your sales force from three people to six people, halfway through the year.
• You will spend 50 per cent less on advertising, which will reduce the number of enquiries from potential customers.

Overcoming barriers to sale

• You are moving to a better location, which will lead to 30 per cent more customers buying next year.
• You are raising prices by 10 per cent, which will reduce the volume of products sold by 5 per cent but result in a 4.5 per cent increase in overall revenue.

Your products

• You are launching a range of new products. Sales will be small this year and costs will outweigh profits, but in future years you will reap the benefits.
• You have new products that have the potential to increase sales rapidly.
• You have established products that enjoy steady sales but have little growth potential.
• You have products that face declining sales, perhaps because of a competitor’s superior product.

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

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Developing your forecast

Start by writing down your sales assumptions. See the page in this guide on your sales 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 individual customers important enough to your business to warrant their own individual sales forecast?
• Can you estimate the conversion rate – the percentage chance of the sale happening – for each item on your 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 per cent chance of this happening, the forecast sales for this customer are £700, ie 70 per cent 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 monitoring your cashflow. See our guide to cashflow management: the basics.

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, your trade association, your business advisers or businesses of a similar size and in similar markets.

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Avoiding forecasting pitfalls

Some common forecasting pitfalls are:

Wishful thinking

Being positive is fine, but being over optimistic with your sales forecasting will not help 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 the mistake of working out the level of sales they need for the business to be viable, then putting this figure in as the forecast.

Not making your forecast achievable

You need to consider if it is physically possible to achieve the sales levels you’re forecasting. For example:

• one taxi can only make a certain number of airport trips each day
• a machine can only produce a given number of components on each shift
• a sales team can only visit a certain number of customers each week

Ignoring your own assumptions

Make sure your sales assumptions are linked to the detailed sales forecast, otherwise you can end up with completely contradictory information. For instance, if you assume a declining market and declining market share, it’s illogical to then forecast increased sales. For more information, see the page in this guide on your sales assumptions.

Moving goalposts

Make sure the forecast is finalised and agreed within a set timescale. If you’re spending a lot of time refining the forecast, it can distract you from focusing on your targets. Avoid making excessive adjustments to the forecast, even if you discover it’s too optimistic or pessimistic.

Not consulting your sales people

Your sales people probably have the best knowledge of your customers’ buying intentions, therefore:

• 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 – rather than just imposing a target on them, especially if they know that it’s unrealistic or unachievable

Not obtaining feedback

Having drawn up your sales forecast, you need someone to challenge it. Get an experienced person – your accountant or a senior sales person – to review the whole document.

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Creating a sales plan

Once you have finalised your sales forecast, you can create an informed sales plan. 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 that will allow you to achieve these objectives. Use objectives which are SMART – Specific, Measurable, Achievable, Realistic, Time-bound. See the page on how to set useful targets for your business in our guide on how to measure performance and set targets.

Using 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 support materials or improved sales incentives?

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CASE STUDY

Here’s how sales forecasting helped my firm

Sisters Emma Harrison and Victoria Nielson started selling fair trade jewellery in people’s homes in 2005. In 2007, The Chocolate Elephant became a limited company selling ethical clothes and gifts.

The business makes most of its sales at charity fairs, but the sisters have also launched a mail order catalogue and revamped their website.

Here Emma explains how the firm forecasts its sales.

What I did

Consider last year’s sales

“The first thing we do is look at last year’s sales and think about our range. One of our products generated 40 per cent of our income last year, but this year we dropped it as it was getting to the end of its life cycle in terms of attractiveness. At charity fairs you have to turn over products quickly, as people come every year.

“Stock levels are also crucial. We start from what we achieved last year and decide what we need to achieve the same sales rate again.

“It’s important to look at the economic climate, too. We’re somewhat dependent on charity fairs – the more bookings we have, the more sales we generate. But retail sector sales have dropped this year, so we’ve introduced a catalogue which will have a direct impact on sales.”

Take seasonal trends into account

“We have two main sales periods – springtime and the lead up to Christmas. Roughly 70 per cent of our sales come in the last three months of the year, so stock management is crucial.

“There isn’t any cash coming in until mid-November. If we hadn’t got our forecast right, we would find ourselves going through several months with very little income and lots of suppliers to pay. We spend a lot of time figuring out who we have to pay next, when the next fairs are, and when the next income is coming in.”

Keep it realistic

“It’s crucial to have a realistic sales forecast. If our forecast isn’t accurate, then at the end of the year we’ve got stock that we can’t sell. There’s a fine line between having too much stock and not enough to meet demand.

“A growing business takes up a huge amount of cash and we’ve grown our stock from an initial £1,000 investment to £65,000. Your sales forecast is essential to knowing how you can fund that stock build-up, in order to grow.”

Adjust the forecast

“There are some factors you can’t control, such as the credit crisis. This year we knew it would be difficult so we’ve looked at our stock and there’s a large chunk we knew wouldn’t sell at full price, so we’ve taken a write-off against last year’s profits.

“You must keep adjusting your forecast. Keep re-examining the numbers and adjusting your stock levels. If your sales are coming in lower than expected, reduce your prices.”

What I’d do differently

Be more price sensitive

“We’ve just put out our new catalogue and I already feel we need to drop some of the prices. Stock becomes dead stock very fast.”

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