Sales Forecasting: The Next Best Thing to a Crystal Ball
No one can predict the future with 100 percent certainty, but intelligent forecasting models can help small and medium-sized businesses (SMBs) do a better job of planning for it. That’s important in all kinds of economic conditions and critical in uncertain ones. Depending on the kind of business you run, there are three forecast categories that may be important: unit sales, sales revenue, and net profit.
One of the best tools available for forecasting unit sales is historical data. Analysis of past performance can help SMBs determine their traditional sales cycles, (i.e., which months tend to show the strongest performance, which the weakest, etc.). Applying current and anticipated changes to the marketplace, your business and your customer base can help you formulate more accurate projections of what future unit volume is likely to be. However, while this model is good for forecasting sales activity, it is of limited usefulness in projecting future revenue if your business also has other revenue streams—rebates, investment or rental income, contracted periodic payment plans, etc.
“For companies that have fairly strong and steady profit margins, and for most service businesses, a sales revenue forecast is all you really need,” suggests Dave Kurlan, founder and CEO of Objective Management Group and author of Baseline Selling: How to Become a Sales Superstar by Using What You Already Know about the Game of Baseball. However, SMBs involved in the manufacture and/or sale of products will need a unit sales forecast to compute their sales revenue projections. The two main approaches to sales forecasting are quantitative and qualitative (judgmental), and many businesses use both simultaneously.
In its simplest form, the formula for a quantitative sales revenue forecast is past sales plus percentage of inflation factor. More detailed approaches factor in aggregate totals of market demand, gross national product, disposal income levels, total number of buyers in the market, and other relevant numbers. Since most businesses must consider a variety of external and intangible factors, they also do qualitative forecasts. This method is also preferred for companies that lack sufficient historical data, especially new businesses. Examples of external/intangible factors include seasonality, general economic conditions, level of competition, political events, supply issues, and styles or fashions.
Net profit forecasts are useful in planning budget changes, and they are particularly important for companies with variable margins—especially for those with short margins, Kurlan says. In its basic form, the formula for net profit forecasting is all costs of doing business—product, personnel, operational overhead, etc.—subtracted from revenue generated by sales. Dividing that number by unit sales gives you profit-per-unit, and you can use that figure to estimate future profits by applying it to your unit sales projection.
“Unfortunately, most forecasts come in two sizes, late and wrong,” Kurlan quips, placing the blame on unreliable sales-pipeline data. He suggests having an expert develop a customized, staged, criteria-based sales pipeline that forces your salespeople to accurately place each opportunity into the proper stage. “With an approach that couples actual sales criteria met with built-in confidence ratings, you can accurately predict which business will close, when it will close, and for how much,” he says.
Inc. Resource: Sales Forecasting Model
This downloadable Sales Forecasting Model form can be used by companies to predict future sales based on past sales performance and an analysis of expected market conditions. The Sales Forecasting Model is used to organize data that will be used to analyze future sales. This form is customizable to fit your company’s specific needs.