How to create a sales forecast for your small business

July 25, 2023 | 7 minute read

What you know about tomorrow can help you make better decisions about running your small business today. A sales forecast can be a helpful tool in estimating future sales, so you can take that information into account in your planning. Simply put, a sales forecast estimates the quantity of goods and services you can reasonably expect to sell over a specified period, the cost of those goods and services and the potential profit. It’s based on your sales in the past, industry benchmarks and market conditions. 

 

A sales forecast is an invaluable tool for better managing your cash flow, spending, staffing and more. Once you complete your forecast, you’ll have a better sense of what’s driving your revenues and profits, know where to put your time and resources and be able to identify efforts that are not fueling growth so you can consider eliminating them. 

 

Why sales forecasting is important

A sales forecast helps you understand your financial position. It can be a good starting point for setting goals and provides guidance in many areas of your business, such as planning for new hires, purchasing inventory and equipment, knowing when to preserve cash, increasing your marketing budget or alerting you that you need to find new ways to make more money. It can also help you illustrate your business’s potential to investors.

 

What factors impact a sales forecast?

A forecast is really an educated guess. There are any number of conditions that might shake up your projections, such as new laws and regulations. A downturn in the economy could mean a change in business conditions, making it harder to get credit. A dip in consumer confidence could lead to less spending on your company’s goods and services. New competition in your market, a drop in customer satisfaction or extreme weather (a major storm that essentially shuts down a city for a few days, for example) could all make a difference in what you thought was going to happen. Something like seasonality can also impact your forecast. Internal factors like new production processes and procedures can also keep you from hitting your target. 

 

Sales forecasting methods

There are several methods to creating a sales forecast. Here are three that many small businesses use:

 

Historical forecasts

This method is based on your business’s past performance. If you’ve been in business for a year or more, you can look back at data by the week, month, quarter or year. If you’ve launched your business recently, this option won’t work well because you won’t have enough data available. 

 

Bottom-up forecasts

To come up with these forecasts, you must project the number of units you will sell, then multiply that figure by the average cost per unit. If you run a larger small business, you can also include metrics like the number of locations, sales representatives or online interactions. The rationale behind a bottom-up sales forecast is to begin with the smallest components of the forecast and build up from there. The advantage of this type of forecast is that if any variables change (like cost per item or number of reps), the forecast is easy to adjust. 

 

Top-down sales forecasts

Start with the total size of the market and estimate what percentage of the market the business can capture. If the size of a market is $20 million, for example, a company may estimate it can win 10% of that market, making its sales forecast $2 million for the year. If you’re a natural optimist, it’s a good idea to ask an advisor to provide a reality check on the percentage of customers in your market that you can reasonably expect to attract and serve so that your projections are more accurate. 

How to create a sales forecast

Once you’ve selected a sales forecasting method, you’ll want to take several steps.

 

1. List the goods and services you sell

In a sales forecast, you’ll want to account for each product or service that you are selling so your forecast is accurate. 

 

2. Quantify your sales

Each sales forecasting method has its own way of estimating future sales: 

 

  • In historical forecasting, you will need to project the quantity of each product or service you will sell and multiply the unit price by that number. In this type of forecasting, you can base your estimate on the sales figure you brought in last month as long as nothing major has changed in the marketplace. So, if you sold $50,000 worth of your product in July, you might estimate selling $50,000 worth in August. 

  • In bottom-up forecasts, you must first estimate the total number of orders that customers will place for your products or services through your website, social media channels and other places you make sales. Then you estimate the average price minus any discounts you offer. Finally, you must multiply the estimated number of orders for each item by the average price to get estimated revenue. 

  • In top-down forecasts, you start by estimating the total market for each item you sell. For example, if you were lucky enough to capture 100% of the sales, how much would you have sold? Then project how much of that market you can realistically capture. So, for instance, if the total addressable market for what you sell is $1 million, and you capture 7% of that with your product, your estimated sales will be $70,000. 

 

3. Make adjustments

Some owners adjust their forecasts to reflect projected market conditions, regulatory changes, new marketing efforts and other variables.

 

4. Subtract costs

Business owners will typically subtract the costs of creating each good or service they sell from their estimated sales forecast to understand how much profit would be generated from sales. Let’s say you sell a backyard game you invented by outsourcing the manufacturing to a local factory. You might subtract overhead expenses, such as paying the factory and buying materials, from your projected revenue to anticipate how much money would be left over as profit. Or if you run a social media agency that has taken on new clients who’ve hired you on retainer, you might subtract costs, such as paying freelancers to write social media posts and subscribing to a website that provides stock photos, to get a clearer picture of future profits. 

 

Tools for sales forecasting

If you haven’t done so already, you might want to consider software to help with sales forecasting. 

 

Sales forecasting software

Sales forecasting software can use historical business data and trends to create a report of expected sales revenue. Forecast reports can compare sales targets with actual sales. 

 

Ideally, sales software can help you answer questions like: 

 

  • What is your expected revenue? 

  • Which forecasting method produces the most accurate forecast for your business? 

  • How did actual sales compare to expected sales?

     

Sales pipeline forecasting software

With sales pipeline forecasting software, you’ll get an analysis of existing opportunities and a calculation of your success rate in pursuing them, helping you prioritize your efforts. This method focuses on pipeline management and calculates a historical win-rate percentage based on the value and age of the opportunity and the sales representative working on it. Some software programs include features that will give you the ability to view pipeline activity and internal sales data or save you time, letting you integrate information from third-party sales software, for instance. You can create sales forecasts using software such as QuickBooks, Salesforce Sales Cloud, Zoho CRM and Pipedrive.

Historical sales forecasting software

Historical sales forecasting software analyzes previous company performance to calculate a mean (or average) sales level you can expect for the following month, quarter or year. It emphasizes historical trends and seasonality of products and services sold, but it does not consider the opportunities in your pipeline. This software is ideal for small businesses that don’t have big swings in their monthly sales. 

 

Bottom line

Your sales forecast can be a vital tool as you make plans to grow your business or adjust to challenges. By comparing your actual performance to your forecasts, you’ll be able to get a clear handle on your success and failures, fine-tune your strategies and capitalize on what is working for you so you can keep your business moving to the next level. 

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