WEV’s Smart Money: Sales Forecasting – the science behind the art
(July 29, 2018) Excerpt of article published September 17, 2018 by Robin Booth on Brixx.com. Edited version by Nicki Parr, WEV’s Business Recovery Specialist.
Is sales forecasting just an arbitrary guessing game? Not at all!
Successful sales forecasts need to be founded in facts, and even new start-ups can find information to draw upon for their forecast – it may just take some more digging. Granted, at some point in your planning, the facts will run out and, as a business owner, you will have to start making some assumptions about what will happen with respect to your market and resultant sales. However, these educated guesses should be heavier on the “educated” and lighter on the “guesses”!
If you are already in business and are not making major changes to your sales methods or sales volume, using existing (e.g. previous year) numbers can provide a firm basis for forecasting your ongoing sales. But before blindly copying your previous year’s results into this year’s forecast, stop! Consider whether the market conditions have changed: are there new competitors or changing consumer needs? Or consider if you may be reaching the maximum customers you can reach with your current sales strategy. If you are aware of any seasonal dips or peaks in sales around certain events or times of the year, you should also build these into your sales forecast.
However, to forecast really effectively, more information is needed than just the past performance of the business. Even well-established businesses need to think like a start-up in terms of market research and forecasting.
Bottom-up (or Zero-Based) forecasting involves looking at the number of customers you can realistically reach through your marketing efforts, and then judging how likely they are to purchase your product or service after you have made contact.
There are 3 steps to making your first bottom-up/zero-based sales forecast:
- Step 1: Research your competition and your customers.
- Step 2: Use this data to predict a stable sales volume and price points that work.
- Step 3: Determine how you will get there
To start with, plan in general terms. Start a forecast, and put some figures in that are similar to your closest competitors, or drawn from industry standard conversion rates. You can change them and in fact, you will, as you refine your research and learn more and more about your business and others like it. But it is a realistic starting point, in a very real sense. Another business has achieved this, and so, in time could you. Then, make several different predictions for your sales volume and pricing – and see where the danger points lie for the business. If your sales are 25% lower than you expect, does the business run out of money at any point in your plan? Can you keep up with demand if sales are 25% higher than you expect? Experimenting with different assumptions like this will ensure you can predict the kind of performance that could hinder or harm your business, and allow you to make cost-saving, marketing or fundraising preparations in advance should they occur.
Remember: fore-warned is fore-armed! Your confidence as a business owner is deeply rooted in your confidence in your finances and the sense of control you have over your numbers, especially your sales numbers.
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