The ability to predict realistic sales levels is essential for a business. Not only does it enable the business to identify and deal with any possible cashflow issues, it also makes it easier to plan for growth, to exploit openings in the market and to manage operations.

A sales forecast provides a business with just such a capability.

Preparing the ground

To create an accurate and working sales forecast, a business needs first to assemble some basic information covering past sales. This information should include the numbers of customers gained and lost in the last year, the periods (if any) when sales rise or dip, and the value of sales made to each customer.

Analysing the sales figures for the past year will allow a business to spot purchasing trends among customers and to find out whether those customers that have been making significant investments intend to spend in the same way during the coming year.

Accounting for changes in circumstance

It is unlikely that the year ahead will exactly duplicate the year that has gone.

A business, therefore, must make certain assumptions about the future and assess any possible changes to circumstances that will affect the volume and value of sales.

There are a number of areas where a business must take an informed view of probable developments. It must assess market trends (is the overall market likely to grow or shrink; is the business's share of the market set to expand or contract?). It must assess the effect of any planned changes to the business (such as increasing prices, for example, or allocating advertising spend from old to new media). And it must assess the impact of any changes to the products or services the business offers (some new products may take time to achieve their potential sales levels; some products may be approaching the full limit of their sales reach; while sales of other, older products may already be on the point of falling).

It is important to assign a definite value - how much of a measurable difference will a price increase have on sales? - to each of these assumptions if the sales forecast is to be meaningful.

The sales forecast

The more detailed a forecast, the more accurate and practical it will be.

It can help, for example, to separate products out by market or area or customer. It is also very useful to calculate the percentage chance of any given sale actually occurring, as this will have an impact on its predicted value. (Bear in mind that the likelihood of making a sale to an existing customer is higher than converting a new customer, so the chance of the sale happening in the former case is correspondingly higher too.)

Specifying the types of product each customer may buy will give a business the opportunity to predict possible supply issues and anticipate both potential shortages and gluts.

It is absolutely essential, however, to make sure that every figure is based on realistic assessments and not on projected or hoped-for increases in sales. This is because a sales forecast is a practical method of managing cashflow rather than a support document for marketing strategies.

For this reason, all the figures should take into account what the business is capable of achieving in terms of productivity and capacity.

Review

As well as consulting sales staff before drawing up the forecast, a business may also choose to get the views and advice of its accountants as this can provide an objective, and therefore invaluable, viewpoint.