How to create a sales forecast?

A sales forecast is essential for formulating a sales plan, which in turn is essential for developing a sales strategy. Without it, it is impossible to see into the future of the company, and therefore difficult to ensure any control over the situation in the long term. Read on, if you’re interested in how to create a sales forecast.

Sales forecast – table of contents:

• What is the sales forecast?
• Who is responsible for sales forecasting in a company?
• Level of verifiability and risks
• Examples of sales forecasting tools

What is the sales forecast?

In the introduction, we have already outlined sales forecasting. However, it is a much more complex issue, which consists of factors such as the formulated marketing plan, competitive situation, demographics, demand, supply, economic conditions or prevailing trends. Based on this data, a company designs a blueprint for its future sales performance, which can be short-term (up to a year) or long-term (more than a year). More specifically, a sample sales forecast template includes the following:

• Planned investments that will contribute to achieving a marked increase in sales (these may include investment in a website, purchase of software or hardware, training, expansion of warehouses, etc.),
• Product decisions to expand the range of products or services available or, conversely, withdraw those that involve excessive expenditures and are not profitable,
• Decisions in the field of human resources – they may concern, for example, employment of qualified specialists thanks to whose support the company will prosper, or so-called “staff cuts” in terms of individual employees, their groups, or the complete elimination of positions,
• Decisions regarding target markets – it can be expansion into foreign markets, as well as territorial narrowing of the activity to the one greatest potential,
• Decisions regarding business partners – manufacturers, distributors, retailers, the value chain can be modified by adding or removing unnecessary links that only increase the final price of the product,
• Promotional decisions – properly targeted promotional activities can significantly increase a company’s sales performance,
• Deciding upon of so-called “cash flow”, the cash inflows and outflows estimated based on projected sales,
• Final results of the company, which are resultant of, among others, the above-mentioned elements.

Who is responsible for sales forecasting in a company?

When it comes to identifying the people responsible for formulating the sales forecast blueprint, it is the duty of the sales and marketing department. They have the best understanding of the market situation and the direction taken by the company. They will also implement the plans formulated based on the forecasts.

Such a forecast is then verified by the Finance Department, which approves it or returns it for correction. If the expected costs exceed the expected revenues, it is necessary to reduce the former or to specify the source of the latter. The approved sales plan then becomes the basis for determining the annual budget of the company – which in turn is the responsibility of the company’s finance department.

Level of verifiability and risks

The specificity of sales forecasting raises some questions about its level of usefulness in improving a company’s sales performance. In this regard, it is important to consider that:

• The basis for sales forecast is the current state of knowledge; reality dynamic. Therefore, apart from the multitude of factors that affect the final result, there is a certain risk that in the face of changing circumstances the forecast will become outdated and there will be a need to make another determination.
• The final results of the forecast depend largely on the individual perception of the authors of the study – the factors and their degree of influence that the authors took into account.
• So far there are no clear rules regarding the selection of tools, the recommended number of experts involved in research, or the level of detail of the analysis. Methodological correctness also does not guarantee greater effectiveness – a smaller number of factors taken into account is associated with a lower probability of having to make changes in forecasts.
• Creating forecasts, despite doubts mentioned above that are connected with them, gives a certain sense of control over the situation, allowing for introducing corrections updating their shape, and gaining experience in planning business activities. Although it is an imperfect tool, at this moment it is difficult to find a more effective one.

Examples of sales forecasting tools

There are many tools used to forecast sales. Among them are:

• time-series analysis and forecasting – which boils down to formulating trends in specific periods and translating them into future,
• method of anticipatory indicators – based on the behavior of variables found to precede changes in the forecast phenomenon,
• econometric models – which examine the impact of the variables being studied on those being forecast,
• heuristic methods – based researchers ability to associate facts and experience,
• the Delphi method – which involves anonymous surveying of researchers and taking positions that are most likely to be replicated,
• scenario method – which consists of creating scenarios – the most probable and pessimistic ones together with actions to be taken in the event of their occurrence,
• analog forecasting – based on analogy; using data about one variable predicts the value of another variable,
• marketing research method – using surveys and focus groups, collecting data available on the market,
• simulations – consisting of experimenting with the participation of customers faced with a marked choice.

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