Forecasting your sales can seem like a tall order. After all, you're an entrepreneur, not a fortune teller. However, by gathering data about your company's current sales performance, you can give yourself the power to look forward with accurate projections of future revenue.
We provide all the steps you need in this comprehensive guide to sales forecasting.
What Is a Sales Forecast?
Sales forecasts predict future sales for your business on an annual, biannual, quarterly, or monthly basis. Accurate sales forecasting analyzes the available data, improving your ability to manage your cash flow, inventory and overall business operations.
You can draw from reports on your company's previous sales as well as economic and industry indicators. Newer businesses without an extensive sales record can conduct market research as part of the forecasting process.
Why Is Sales Forecasting Important?
Sales forecasting facilitates other financial insights, including profit and loss statements, balance sheets, and cash flow statements. These documents in turn allow you to understand more about your company's finances, which is especially important for a new entrepreneur.
An accurate sales forecast helps you make data-driven decisions for your small business. You can more precisely predict your revenue for the coming quarters and years, which will inform smart investments in growth and other objectives. Conversely, if your predictions reveal a potential sales shortfall, you can take action now to mitigate the impact on your company's success.
In addition to enhancing your operational intelligence, sales forecasts create confidence in your business. As your operation expands, you'll be able to share your data with potential investors, partners, and other stakeholders. Strong sales predictions build trust among these critical contributors to your company's success.
Sales forecasts clarify how your company ranks among competing businesses. You can look at these numbers to get an idea of how you're doing and where you can potentially improve operations.
You can also use sales forecasting to illustrate the value of different segments of your business. For example, you can determine whether a certain department drives profit and make changes to boost productivity and efficiency to turn things around when needed. When you see sales dipping, you can allocate more of your marketing budget to promote that product or service line.
4 Types of Sales Forecasting Models
You may encounter these 4 common sales forecasting models as you prepare for this process:
- Causal analysis, a method based on evaluation of cause and effect. For this sales forecast model, you'll review the potential impact of an array of market variables that could cause your revenue to increase or decrease over the period in question.
- Time series analysis, which involves collecting a range of data points over a set amount of time. You can use this model to extrapolate future sales based on past performance.
- Regression analysis, which requires a deep dive into your sales process. You'll look at ways to maintain best practices that support strong sales while evaluating opportunities to improve and enhance your operations.
- Trend analysis, which uses past revenue results to predict future sales. Looking at weekly, monthly and yearly trends in performance allows you to anticipate coming rises and falls in revenue.
4 Steps to Create a Sales Forecast
To forecast your sales, you need to predict how many products you can sell for the time period in question. Based on the prices for those items, you can estimate your profit. Follow these simple steps to complete the necessary calculation.
Inventory Products and Services for Sale
First, you'll need to list everything you expect to sell over the forecast period. If you offer a lot of different items, you can categorize them into groups for the purposes of the sales forecast.Try to stick to less than 10 categories so you won't become overwhelmed by the process. You can always add detail once you become well-versed in sales forecasting.
Review the Sales History
For this step, you'll want to determine how much you'll sell in each of the categories you defined in step 1. You should base these projections on historic sales data assuming you've been in business for at least a few months. You'll be able to make more accurate projections once you have about a year of data in hand.
Elements to examine in your sales history include:
- Overall sales volume
- The number of sales during the review period (known as the sales run rate)
- Trends over time
- Changes in demand and potential driving factors such as seasons
Calculate Cost and Revenue Data
Now that you have a quantity in place for each category, you'll multiply that number by the corresponding unit price. If you're grouping multiple products or services, you may want to use an average or median price for forecasting purposes. Your answer is the projected revenue for the period in question.
Next, multiply each category's item quantity by the cost of the items in question. That calculation provides the total creation cost for those services and products.Take the cost and subtract it from the revenue number you calculated above to accurately estimate your profit for the projection period.
Consider the Impact of Internal and External Factors
You may want to adjust your forecasted revenue based on circumstances within your business, industry and the overall economy. Potential factors to consider include:
- Changes in laws that affect your sector and either hamper your sales abilities or give you new opportunities
- Plans for new products and services, as well as plans to raise prices on your current offerings in response to market conditions
- The economic and global landscape depending on the scope of your company's reach, including changes in market percentage, competition and economic growth
- Marketing objectives that may positively affect your sales, such as a new content campaign or an expanded social media strategy
- Technological innovations that change the way you do business, shift demand for your products, or otherwise affect your industry
The Benefits of Working with Pay.com as Your Payment Service Provider
Pay.com supports strong sales forecasting with comprehensive analytics. It's a user-friendly solution that provides everything you need in our Pay Dashboard. In just a few clicks, you'll have the data you need to create precise predictions about future sales.
If you're looking for advanced options, we have those too. Your web development team can integrate your existing website and your favorite tools with our software development kit and API (application program interface).
Pay.com also protects your business and your customers with the highest level of industry-standard data security. Our compliance with Payment Card Industry Data Security Standards (PCI DSS or PCI for short) reflects our commitment to high-tech tools like tokenization, encryption, and multi-factor authentication to shield sensitive information such as credit card numbers.
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The Bottom Line
Successful small business owners need the vision to plan and execute big-picture goals. You can develop this sixth sense by using this four-step sales projection system. When you understand how much your company can expect to make over the coming quarters, you can begin to put that revenue to the best possible use.
Selecting Pay.com as your full-service payment infrastructure gets you one step closer to strong sales foresight. In addition to detailed reporting analytics, industry-best security tech and easy onboarding, we offer multiple methods of payment so you can be sure to align with customer preferences.