5 Key Tips on Sales Forecasting for Business Owners

Don't underestimate the value of a sales forecast for running a business effectively. Even if you do nothing else in the way of planning, having just a sales forecast plus regular review and revision can go a long way towards better business management.

Here are five tips that have helped me integrate the sales forecast into my management process for decades.

1. Set the bar right from the beginning

One of the biggest problems with sales forecasting is the idea that it's supposed to be accurate months in advance. That's not the point. It's about connecting the dots between sales and related expenses, finding the drivers (see #4 below) and tracking results so you can see changes as they happen.

It's unlikely you will set a sales forecast and then live with it, unchanged. As in tip #5 below, you set the forecast and then watch, carefully, for interruptions, fluctuations, etc.

What you forecast for sales next summer, while you work on it for the present month, is a matter of getting the interrelationships written down so you can track progress and manage change.

In the real world, when you do your forecasting right, you'll have lots of revisions as time and other factors affect your predictions. Just get it down early, so you can review results later. If you don't forecast, you're running blind.

2. Find the right level of aggregation and summary

Don't forecast your sales as one number, in dollars. Don't forecast sales as 100 detailed lines of sales. Find a level of sales groups you can manage. This has to do with the way we, as humans, think. We can't work with too much detail; but it's still useful to break things down enough to offer meaningful insights.

The most obvious example is breaking sales into units and price per unit. With that simple breakdown we can later analyze, whether the difference between planned and actual results were caused by price differences, volume differences, or both. And natural divisions, such as channels of distribution, or major product categories, can be very useful.

Find the level of summary and aggregation that works for your business. You're unique and so is your business. There are no hard and fast rules on this. Make it so it works.

For example, with my software business, we don't forecast sales broken into dozens of different sub-versions and options; we forecast our three main lines, aggregated and summarized.

The restaurant ought not to do a sales forecast broken down into each of the 75 items on the menu; but rather major sales categories, such as meals, drinks, appetizers, and other; perhaps it could be breakfast, lunch, and dinner.

The bookstore ought not do a sales forecast for each book. Imagine how difficult and inefficient. It might be more useful to forecast for paperback versus hardback, fiction versus nonfiction, books versus magazines.

3. Match your accounting

Most of the benefit of the sales forecasting comes from the ongoing management of the difference between planned and actual results (as in #5 below). Therefore, to ensure your sales projections is worthwhile, make sure the organization of the forecast in rows or items or groups matches the way your accounting or bookkeeping tracks them.

Match your chart of accounts, which is what accountants call your list of items that show up in your financial statements.

If the accounting divides sales into meals, drinks, and other, then the business plan should reflect those divisions. if your chart of accounts divides sales by product or service groups, keep those categories intact in your sales forecast. If bookkeeping tracks sales by product, don't forecast your sales by channel instead.

If you're planning for a startup business, coordinate the bookkeeping categories with the forecasting categories.

Get your last Income Statement (also called Profit & Loss) and keep it in view while you develop your future projections.

  • If you don't have more than twenty rows of sales, costs, and expenses, then make the rows in the projected statement match the rows in the accounting.
  • If your accounting software summarizes categories for you – most systems do – consider using the summary categories in your business plan. Accounting needs detail, while planning needs a summary.

If your categories in the projections don't match the accounting output, you're not going to be able to track plan versus actual as well. It will take retyping and recalculating. You may lose the most valuable benefit of business planning: management.

4. Look for your specific sales drivers

Most every business has the so-called drivers that lead to sales. For some businesses, it's foot traffic; for others, it's web traffic. Maybe for you it's downloads. Some traditional businesses look at lead generation, leads, presentations, and closes. Others consider the pipeline related to direct sales deals in the cycle from lead to close.

Use the concept of sales drivers to help develop a sales forecast and then manage the business process that generates the drivers. It will help you track and manage your business better.

For example, in our software business we look at organic web traffic, pay-per-click web traffic, and traffic generated by affiliates, all of which we measure in visits. And we look at conversion rates, which we measure as the percent of web visitors who end up purchasing software.

And, as another example, back in the 1990s when retail sales were important, we measured unit sales per month per store.

Think about what factors drive sales for your business; and how you can use the measurements of those factors to improve your sales forecast.

5. Review and revise often

Don't let your sales forecast sit unused. Schedule a regular time for sales forecast review and revision at least once per month. Get your forecast and compare it to actual results. Look for surprises both good and bad. Reward people whose work influenced the good surprises, and talk to the people responsible for bad surprises or poor performance. Revise your sales and marketing programs to take advantage of what's working well, and correct what isn't.

Sales forecasting, done right, is a fundamental part of planning. And planning, done right, is management.

As former president and military strategist Dwight Eisenhower once said: “The plan is useless; but planning is essential.”

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