Importance of a Sales Forecast and Why You Should Have One

What is a sales forecast

The Sales Forecast is one of the main predictive tools that every business should use. These are:

  • Sales Forecast
  • Profit and Loss
  • Cash Flow Forecast

They should be tackled in this order because one follows on from the other. Often a work of pure fiction, we take a look at the first, the sales forecast? We will look at how we can make it both accurate and inspirational.

Time for a quotation that could have been written about sales forecasts. It’s ”to thine own self be true” spoke by Shakespeare’s Polonius.

Having been a Salesperson, Sales Manager and a Sales Director I have been on both ends of the sales forecast. That is both the giving and receiving of this prophecy technique and I can assure you that they are seldom based on truth.

The Traditional Sales Forecast

This is often given by a salesperson to his or her superiors. It enables the Manager or Director to anticipate the level of business that is likely to arrive in the future months.

In our case we will be telling ourselves what they forecast is and it is vital that we get it right.

I wish I had a dollar for every time that I’ve watched a sales person put up a sales forecast that, despite his failure to get actual sales that were anywhere near his previous months predictions, still bore a strong resemblance to the targets forced upon him by management.

These presentations often came with great enthusiasm and conviction.

As these forecasts are not discussed again till the next month’s sales meeting it leaves the owner a month to find another job and hand in their notice.

I kid you not. I’ve seen it many, many times.

What is in the Forecast?

We can’t do this. It is our business and survival is vital. So what is the sales Forecast?

The exact contents of the forecast will vary slightly from on type of business to another however the basics remain the same.

A sales forecast is an attempt to accurately predict the sales for a given period into the future usually less than a year. As you and I both know, the further into the future you try to predict the less accurate will be your predictions.

You can see this in the weather forecast. It takes a brave weatherman to forecast more than a few days ahead. Remember Michael Fish who in 1987 told one worried viewer that ”there will be no hurricane” on the day before the storm that claimed 20 lives hit the UK.

So in its simplest form a Sales forecast could be:

Month – April May June July Aug Sep Oct Nov

Turn Over $ 2ooo 2000 2,500 2,500 2,750 2,750 3000 3,000

This gives us the basic information, that is, the month and the anticipated sales.

Digging Deeper

In most businesses, including yours I suspect, the sales will be more complex than this. You need to take into account two other factors.

  • Which Clients/ Prospects/ Products will contribute how much of the months sales
  • What level of certainty or probability do each represent.

Without this additional information the forecast is of limited use. If we miss our target, then, what were the causes, what can we do to prevent it happening again etc.

So now if we look at each in turn.

Clients, Prospects and Products

This is where we show how much these individual divisions will contribute.

Looking at April on our earlier chart we anticipate an income of $ 2000.

We also need to know where that is to come from so it could be something like this:

April Smith & co

Product Widget 1 Thingy 2 Whats it 5 Accessories Total

Amount $ 200 800 500 500 2,000

I’ve kept it simple however it can be highly involved where you have a lot of products or customers.

If you are using a CRM software, then you will be able to produce this far more efficiently.

You may also wish to separate existing client orders from prospective customer orders.

Handling Certainty or Probability

Don’t panic, when I mention probability I am not about to dive into a long lesson on statistics.

Going back to our earlier simplified example we had accessories $500.

That assumes that we are 100% certain that we will get that business and the sale will be placed in the month quoted.

In the real world we have several stages of a sale as the sale progresses

Initial Contact – email, phone call – level of interest unknown……………0%
Interest expressed…………….10%
Visit client, introduce product, send brochures……………………20%
Prospect will proceed however has not selected the supplier you are one of three………30%
You and your product have been selected……………….50%
Order received…………………….100%

You will have to decide on the stages of the sale that are relevant to your business.

Once this is done you can attach % certainties to each. I have put some samples in just to show one way that you can arrive at these. These percentages will be applied to the anticipated order value to arrive at the forecast value i.e.

$200 product with 50% certainty means we have $ 100 actual forecast.

To think of it another way, If you had two products at $200 however you were not sure that you would get both you could put one forward at 100%.

This is often done in sales however with your own business it’s better to list every single prospect with the products and individual probabilities.

When you have the information that you need enter it onto a form such as the one I have shown here.

This show only one month however can be repeated for more months depending on how long a forecast period you are looking at.

Summary

I hope that you will find this article helpful. The only way to really get good at forecasting is to do it and then to look at the actual results after the end of that month.

If you find that you tend to overestimate and that real sales do not come up to your forecast levels then, try to be a little less optimistic next time. The opposite applies to being pessimistic. At all costs be honest.