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Guide

Forecast and plan your sales

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Accurately forecasting your sales and building a sales plan can help you to avoid unforeseen cash flow problems and manage your production, staff and financing needs more effectively.

A sales forecast is an essential tool for managing a business of any size. It is a month-by-month forecast of the level of sales you expect to achieve. Most businesses draw up a sales forecast once a year.

Armed with this information you can rapidly identify problems and opportunities - and do something about them.

While it's always wise to expect the unexpected, a well-constructed sales plan, combined with accurate sales forecasting, can allow you to spend more time developing your business rather than responding to day-to-day developments in sales and marketing.

This guide shows you how to put together a sales forecast and a sales plan.

A basis for sales forecasts

Sales forecasts enable you to manage your business more effectively. Before you begin, there are a few questions that may help clarify your position:

  • How many new customers do you gain each year?
  • How many customers do you lose each year?
  • What is the average level of sales you make to each customer?
  • Are there particular months where you acquire or lose more customers than usual?

Existing businesses

The starting point for your sales forecast is last year's sales.

Before you factor in a new product launch, or an economic trend, look at the level of sales for each customer last year. Do you know of any customers who are going to buy more - or less - from you next year?

In the case of customers who account for a significant value of sales, you may want to ask them if they plan to change their purchase level in the foreseeable future.

New businesses

New businesses have to make assumptions based on market research and good judgement.

Every business can also add in the new customers that it expects to attract without actually knowing who they are, or what they will buy. Simply enter "new customer" on your forecast.

Depending on your type of business, you may want to specify the volume of sales in the forecast - for example, how many 3.78-litre cans of paint you sell - as well as the value of sales. By knowing the volume, you can plan the necessary resources in areas such as production, storage and transport.

Your sales assumptions

Every year is different so you need to list any changing circumstances that could significantly affect your sales. These factors - known as the sales forecast assumptions - form the basis of your forecast.

Wherever possible, put a figure against the change - as shown in the examples below. You can then get a feel for the impact it will have on your business. Also, give the reasoning behind each figure, so that other people can comment on whether it's realistic.

Here are some typical examples of assumptions:

The market

  • The market you sell into will grow by 2 per cent.
  • Your market share will shrink by 2 per cent, due to the success of a competitor.

Your resources

  • You will double your sales force from three people to six people, halfway through the year.
  • You will spend 50 per cent less on advertising, which will reduce the number of enquiries from potential customers.

Overcoming barriers to sale

  • You are moving to a better location, which will lead to 30 per cent more customers buying next year.
  • You are raising prices by 10 per cent, which will reduce the volume of products sold by 5 per cent but result in a 4.5 per cent increase in overall revenue.

Your products

  • You are launching a range of new products. Sales will be small this year and costs will outweigh profits, but in future years, you will reap the benefits.
  • You have products that are newly established and that have the potential to increase sales rapidly.
  • You have established products that enjoy steady sales but have little growth potential.
  • You have products that face declining sales, perhaps because of a competitor's superior product.

For new businesses, the assumptions need to be based on market research and good judgement.

Developing your forecast

Start by writing down your sales assumptions. See the page in this guide on your sales assumptions.

You can then create your sales forecast. This becomes easy once you've found a way to break the forecast down into individual items.

  • Can you break down your sales by product, market, or geographic region?
  • Are individual customers important enough to your business to warrant their own individual sales forecast?
  • Can you estimate the conversion rate - the percentage chance of the sale happening - for each item on your sales forecast?

For example, you might predict that a customer will purchase $1,000 worth of products. If you estimate that there's a 70 per cent chance of this happening, the forecast sales for this customer are $700, i.e. 70 per cent of $1,000.

Selling more of your product to an existing customer is far easier than making a first sale to a new customer. So the conversion rates for existing customers are much higher than those for new customers.

You may want to include details of which product each customer is likely to buy. Then you can spot potential problems. One product could sell out, while another might not move at all.

By predicting actual sales, you're forecasting what you think will be sold. This is generally far more accurate than forecasting from a target figure and then trying to work out how to achieve it.

The completed sales forecast isn't just used to plan and monitor your sales efforts. It's also a vital part of the cash flow.

There is a wide range of sales forecasting software available that can make the whole process much simpler and more accurate. This software generates forecasts based on historical data. If you are considering buying software, get advice from an IT expert, your trade association, your business advisors and businesses of a similar size and in similar markets.

Avoiding forecasting pitfalls

Five common forecasting pitfalls are:

Wishful thinking

It's all too easy to be over-optimistic. It's a good idea to look back at the previous year's forecast to see if your figures were realistic. New businesses should avoid the mistake of working out the level of sales they need for the business to be viable, then putting this figure in as the forecast.

You also need to consider if it is physically possible to achieve the sales levels you're forecasting. For example:

  • one taxi can only make a certain number of airport trips each day
  • a machine can only produce a given number of components on each shift
  • a sales team can only visit a certain number of customers each week

Ignoring your own assumptions

Make sure your sales assumptions are linked to the detailed sales forecast, otherwise you can end up with completely contradictory information. For instance, if you assume a declining market and declining market share, it's illogical to then forecast increased sales. For more information, see the page in this guide on your sales assumptions.

Moving goalposts

Make sure the forecast is finalised and agreed within a set timescale. If you're spending a lot of time refining the forecast, it can distract you from focusing on your targets. Avoid making excessive adjustments to the forecast, even if you discover it's too optimistic or pessimistic.

No consultation

Your sales people probably have the best knowledge of your customers' buying intentions, therefore:

  • ask for their opinions
  • give them time to ask their customers about this
  • get the sales team's agreement to any targets that will be set

No feedback

Having built your sales forecast, you need someone to challenge it. Get an experienced person - your accountant or a senior sales person - to review the whole document.

Creating a sales plan

The questions you should answer in your sales plan are:

  • What are you going to focus on?
  • What are you going to change?
  • In practical terms, what steps are involved?
  • What territories and targets are you going to give each salesperson or team?

The sales plan will start with some strategic objectives. Here are some examples:

  • break into the municipal market by adapting your product for this market
  • open a store in an area that you believe has the potential for generating lots of sales
  • boost the average sale per customer

You can then explain the stepping stones that will allow you to achieve these objectives. Use objectives which are SMART - Specific, Measurable, Achievable, Realistic, Time-bound.

Using the example of breaking into the municipal market, the stepping stones might be to:

  • hire a sales person with experience of the municipal market on a salary of $48,000 by the beginning of February
  • fully train the sales person by mid April
  • ensure that any changes the product development team has agreed to make are ready to pilot by the beginning of April

As well as planning for new products and new markets, explain how you're going to improve sales and profit margins for your existing products and markets. It is often helpful to identify how you will remove barriers to sales:

  • Can you increase the activity levels of the sales team - more telephone calls per day, or more customer visits per week?
  • Can you increase the conversion rate of calls into sales - through better sales training, better sales support materials or improved sales incentives?

Original document, Forecast and plan your sales, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs


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