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The Role of Sales Forecasts in Business
Every business needs to create forecast its financials. One of the most important elements of developing financial forecasts is projecting future sales. There are many different methods businesses can use to come up with sales forecasts. As a business owner, you want to know the different strategies for developing sales forecasts.
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Use More than One Forecast
Many business strategists tell entrepreneurs to plan for the worst. They suggest using a very conservative estimate to forecast sales. On the one hand, it is important to make sure you aren't overly optimistic when making important financial and managerial decisions. If you anticipate sales being higher than they are, you may end up taking out too much debt or letting your expenses get higher than they should.
On the other hand, you need to keep yourself, your investors and your employees optimistic. Asheesh Advani suggests developing a more aggressive sales forecast that will help you stay focused on your goals. You want to become a big company and cannot do that without strong growth projections.
Combine the two plans. Use your most conservative plan for making key management decisions. Your more aggressive plan will help you stay motivated and will help inspire some great ideas to take your business to the next level.
Some experts actually suggest using three sales projections. You can have projections for your best case, worst case and most likely scenarios. You can never predict exactly what will transpire, so it is best to plan for all possible outcomes.
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There are a number of different methods you can use to estimate future sales:
- Use previous years data. One strategy is to look at your sales data from previous quarters. Estimate growth rates to predict future sales. The important thing is to be realistic and have an objective method of projecting growth. take into consideration factors such as economic indicators, new competition and changes in anticipating excessive growth can cause you to buy too much inventory or take on too many loans.
- Use data on available competitors. Look at other businesses in your area. Find nearby businesses with similar size. Find out what their sales are and use them as a benchmark. Adjust your own sales according to your own marketing strategy and how long you have been in business. If you have just opened up for business, you may not meet those projections for at least a year or two. At least you can base your projections off of relevant data, rather than pulling numbers out of thin air.
- Base off of market size. Another option is to estimate the overall size of your market. How many people live in the area you operate in? What percentage of those people are likely to become customers? For example, if there are 20,000 people living within 20 miles of your business and 3% of them may be paying customers, you have the potential to reach 600 customers. Estimate how many of those customers you can sell to in the next year at a given price point.
- Conduct market studies. You can conduct your own marketing research to anticipate the demand for your products or services. You can use this information to predict how your sales will change if you change prices, add new products or change your promotional strategies. The advantage of this process is that you are basing your forecasts off of information from your customers, rather than old data or potentially unreliable economic indicators.
- Estimate sales for each product. This is a more detailed method of projecting sales growth. You can forecast sales for each of your products to anticipate your overall sales. This will take more work, but it may give you a better idea of what your sales will look like in the coming months.
There are many different strategies you can implement to forecast sales. Take the time to understand your market and develop sales projections accordingly.
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Projecting Future Sales is Crucial
It is essential that you develop reasonable sales forecasts for your business. These forecasts will be necessary when you are ordering inventory, hiring staff, approaching investors and planning your own financial future. Although you want to be optimistic, you can't be unrealistic. One business owner purchased a Subway store expecting to quadruple sales in six months. They were bankrupt a year later when sales dropped. Many businesses make the mistake of projecting the sales they want, rather than using an objective forecasting technique. You need to make sure you have a reliable strategy when you are coming up with sales projections when you are planning the future of your business.