Creating an effective sales forecast for your business lets you "see into the future", helping you optimise your supply chain and inventory, staff appropriately, and plan for sustainable growth.
In this guide, we'll look at different types of forecasting, the benefits and challenges, and how to manage forecasting in your business.
What is a sales forecast?
A sales forecast is a way to project future sales of a product or service using past sales data and other inputs.
You can use a forecast to predict sales for the coming week, month, quarter, year or more.
What is the purpose of a sales forecast?
The purpose of a sales forecast is to help you predict and plan for future revenue.
Sales forecasts give you clarity around likely sales volumes, so you can plan your spending and manage cash flow, optimise inventory levels and staffing, and even open new locations or expand your business.
Who is responsible for creating a sales forecast?
The person who creates a sales forecast differs depending on the size and structure of your business.
Sales forecasting is part of sales management, which means it's usually done by the sales manager or head of the sales team. If you own a smaller business, sales forecasts may be your responsibility.
Sales forecasting methods
There are several common sales forecasting methods, including multivariable forecasting which combines elements of different forecasting methods.
Opportunity forecasting
This method, sometimes called opportunity stage forecasting, involves breaking your sales cycle into stages, then calculating the likelihood of conversion at each stage.
Opportunity forecasting can help you identify the most important parts of your sales cycle and where you should focus your energy.
Historical forecasting
This relatively simple forecasting method uses data from previous sales periods, including sales volume (the amount of product sold) and velocity (the rate of increase in sales over time).
By multiplying sales volume from the previous period by sales velocity, you can work out how much your sales are likely to increase in the next period.
Pipeline forecasting
This method uses data from your sales pipeline, individual salespeople or locations to predict the success of a particular sales period. Data about the value of each potential sale and the win rate of each salesperson or team helps you estimate revenue for the upcoming week, month or year.
Intuitive forecasting
This type of forecasting uses human inputs as well as hard data.
It starts with asking your salespeople or teams how confident they are about specific sales — because they're the ones most involved with the sales process, it makes sense that they would know best.
From there, you can use other metrics to forecast sales for the upcoming sales period.
Length of sales cycle forecasting
This method of forecasting is based on the length of your sales cycle, making it more specific to your business and industry.
For example, if you're in an industry where closing a sale can take multiple meetings over months, a short-term forecasting method isn't likely to be useful.
With length of sale forecasting, you use the average length from prospect to conversion, look at how long potential sales have been in the pipeline, and predict upcoming sales using that information.
Multivariable analysis forecasting
This method combines elements of the previous forecasting frameworks. As the name suggests, multivariable analysis uses data from a range of sources to deliver a detailed — and accurate — picture of future sales.
Inputs can include the length of your sales cycle, the win rate of sales teams or people, the volume of sales for previous months, and outside factors such as competitor sales or market changes.
Of course, the accuracy of any multivariable analysis depends on the accuracy and currency of your data.
Benefits of a sales forecast
The benefits of sales forecasting include improving inventory management, optimising costs against income, planning for growth, and ensuring you've enough staff on hand when you need them.
Improve management of inventory and supply chains
If you know how much stock you're likely to sell in the coming weeks and months, it's much easier to manage inventory levels so you can avoid high carrying costs, lost sales and unhappy customers from understocking.
A good sales forecast lets you know how much to buy, so you can order ahead of time, make stock available when and where you need it, and optimise your supply chain to ensure reliable delivery.
Manage costs against income
Forecasting is also useful when it comes to managing costs against income. Insight into future revenue can help you balance costs against income and plan major expenses to coincide with rising revenue.
Plan for growth
If you're planning to expand your operations, open new locations, buy new equipment or find more space for manufacturing, accurate forecasting is a useful tool.
If you know demand is likely to rise in the next few months or years, you can make informed decisions around expansion and growth.
Manage staff volumes
Like inventory, staff volumes need to match demand. Overstaffing is wasteful while understaffing can lead to lost sales and frustrated customers.
Forecasting helps you get staffing ‘just right' by projecting sales for specific periods and seasons, so you can roster or hire appropriately.
Challenges of creating a sales forecast
The challenges involved with creating a sales forecast include inaccurate data, lack of sales history, assumptions about performance and over-reliance on a key supplier.
Of course, no matter how accurate your forecasts, unexpected events can also have an impact on sales results.
Data accuracy
The accuracy of your forecast is tied to the accuracy of your data. If you're using disconnected systems and have data silos, your numbers aren’t likely to be up-to-date and error-free, so your forecasts won’t be very helpful.
Sales history
Most forecast methods rely on past sales data — if your business hasn't been around long enough to build a sales history or if you've not been keeping accurate or detailed records, it could be difficult to forecast accurately.
Assumptions on business performance
Forecasts require you to make some assumptions about business performance. For example, you may use a fixed rate to project increases in revenue over time.
However, real life doesn't always match up to those assumptions. Sales can slow for any number of reasons — from competitors entering the market to weather events or roadworks impacting foot traffic to your store.
Reliance on suppliers
Your forecast shows promising sales, but if your suppliers can't keep up with demand, then those sales can't happen.
If supplier issues or stock shortages are eating into potential sales, you may need to look for alternate suppliers.
Unexpected events
Even the most accurate forecast can be turned on its head by an unexpected event — a natural disaster, sudden loss of key staff members or changes in your industry.
How to create an effective sales forecast
Creating an effective sales forecast starts with choosing the right method, gathering data, and looking at wider trends in your sector.
Choose a forecasting method
There's no single forecasting method that works for every business. The right option depends on what your business does, how your sales process works, the software and data you have on hand, and how much time you can devote to forecasting.
For example, straightforward historical forecasting works well for many retail businesses, while length-of-cycle forecasting would be more appropriate for a real estate agency or B2B software business with less frequent sales.
Define your sales objectives
What are your sales goals? These could be increasing sales month-by-month, boosting average sale value or shortening your sales cycle.
Once you've created your sales forecast, you can check against your goals to ensure you're being realistic.
Establish a clear sales process
A deep understanding of your sales process is crucial for accurate forecasting. If you don't have a clear, consistent sales process, it's more difficult to estimate potential sales and project revenue over time.
Invest in a CRM
A CRM not only helps you track sales and understand your sales process, but many have built-in forecasting tools and dashboards that can save significant time and effort.
Analyse market trends
Forecasting isn't just about what's happening inside your business — it's also important to look at wider market trends, competitor sales and processes, and economic changes that could impact your business.
Review historical data
Past sales data is a vital piece of the forecasting puzzle. If your business has only been operational for a short time, you may not have a lot of historical data, but it's still worth looking at the numbers as you move forward.
Review previous sales forecasts
If you've used forecasts in the past, reviewing those numbers compared to real-time outcomes can be a helpful way to gain more insight.
If there's a major disconnect between projections and revenue, it could indicate a problem with your forecasting process or your business data.
Monitor and update regularly
Forecasting is an ongoing process, with regular monitoring, tweaks and updates needed to ensure it's working for your business.
Some businesses forecast day by day, some run a sales report with projections every week or month, and others forecast quarterly — it all depends on your sales turnaround time and goals.
If you have a CRM or accounting software with built-in forecasting or analytics tools, it's relatively straightforward to make forecasting part of your day-to-day business.
You may be able to check metrics like sales, growth and velocity through a simple dashboard, then set goals for the following sales period immediately.
Sales forecasting best practices
Best practices for sales forecasting include using clean, accurate data, considering both internal and external factors, and choosing the right forecasting framework.
Ensure the data you're using is clean and concise
Whether you're pulling data from your CRM, accounting software, ecommerce platform or other business management tools, clean, concise data is key.
Errors, double-ups and missing data will affect the accuracy of your forecast.
Account for external and internal factors
Consider external factors like market conditions, competitors, season and internal sales results.
Select the correct forecasting method
Picking the right forecasting method can be the difference between a valuable forecast and an inaccurate waste of time.
For example, a small retail store probably doesn't need to run a complex multivariable analysis just to project sales for the next 6 months — a simpler historical forecast would offer enough information.
Example of a sales forecast
Here's an example of a basic historical forecast:
Hannah's Pet Supplies
Monthly revenue (Jan 2024): $150,000
Growth rate: 12% per month
Average churn: 1% per month
February 2024 (forecasted): $166,500
Calculations:
Sales forecast = Current revenue x (1 + growth rate) - Current revenue x churn rate
So, sales forecast = ($150,000 X 1.12) – ($150,000 X 0.01) = $166,500
Sales forecast FAQs
How do you create a 12-month forecast?
Follow these steps to create a basic 12-month forecast:
Divide your revenue for the previous year by 12 to find your monthly average sales.
Compare month-by-month sales to find the average percentage increase in revenue – if any.
Multiply average sale value by expected growth to find projected sales for the next month. Then calculate using that figure for the following month – and so on.
Add monthly figures to find your projected revenue total for the coming year.
Is Excel good for forecasting?
Excel can be a useful forecasting tool because it's endlessly flexible — you can input almost any calculation and customise it to fit your business.
However, if you're not an Excel expert, it can be an overly complicated and time-consuming way to create sales forecasts. If you're not prepared to create and manage your own forecast spreadsheets, a simpler, user-friendly app or purpose-built online tool could be a better option.
What is the number one rule of forecasting?
The number one rule of forecasting is: your forecast is only as accurate as your data. If you're working with old, inaccurate or inaccessible data, it's very difficult to create a useful sales forecast.
Fast, simple forecasting with MYOB
A sales forecast is a powerful tool for small business owners, helping you keep the right products in stock at the right times, staff appropriately, and plan for future income and ongoing growth.
MYOB's financial reporting software helps you track and record sales, growth and ongoing costs. Smart, simple and effective, it's the best way to make sure your business has accurate, up-to-date sales numbers on hand to create useful sales forecasts. Get started today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.