If you're in sales, you know all too well that things rarely go as planned. Without a proper roadmap, it can feel like navigating your business through choppy waters without guidance or direction.
You see, to make smart decisions in your business journey, you need to know where you're headed. That's where sales projections come into play.
Learning how to calculate sales projections is like connecting the dots between your sales and expenses.
In this article, I’m going to teach you to create accurate and actionable forecasts using sales projection calculation – plus, I’ll throw in some other methods along the way.
Sales Forecasting Explained
Sales forecasting (or demand forecasting) is essentially the process of making educated guesses about how much of your product/service you're going to sell in the future, typically over a specific time frame, like a quarter or a year.
For instance, let’s say you run a company that manufactures office furniture.
You've been keeping a close eye on your sales data, and you notice a trend. Every month, a particular client places an order for 100 desks to stock their inventory. This pattern repeats month after month.
Now, if you're in the middle of July, and you've been tracking this pattern, you can confidently predict that this office supply company will likely order another 100 desks from you in August.
In a nutshell, sales forecasting helps you plan ahead, manage your production, allocate resources effectively and make informed decisions about your B2B business.
Why Does Sales Forecasting Matter?
Sales forecasting isn't just some fancy business term – it's the key to growing and scaling your business. Here are seven reasons why you should care about sales forecasting:
1. Setting Clear Goals and Making Plans
When planning a trip, you need a map to know where you're going and how to get there, right?
Well, sales forecasting is like that map for businesses. It helps you set clear goals and create plans by guessing how much you'll sell in the future. You look at past patterns and your current conditions to make reasonable predictions.
These patterns help you understand the cause and effect of the choices you make, giving you a clearer picture of where your business is headed.
2. Using Resources Wisely
Think of your business resources as tools to help you achieve those goals and plans. So, you want to use them in the best way possible. Sales forecasting helps with that. It lets you use things like money, workers and equipment in the smartest way.
You can create products that prospects want, reduce waste, lower operational costs and ultimately bring in more profits.
3. Keeping Just Enough Stuff
Imagine you run a store, and you want to have just the right amount of stuff on the shelves. I mean, if you have too much stuff, that’s money sitting on the shelf. But if you don’t have it when the customer wants it, that’s money walking out the door.
With sales forecasting on your side, you can accurately guess how much inventory and stock you need.
4. Managing Money and Bills
In business, money is like fuel for a car. You need it to keep going.
Sales forecasting helps you plan how much money you'll make. You can make wiser plans about how to use your money and when to ask for more.
5. Making Smart Moves
Winning in business is like winning at chess. In chess, you must think ahead and plan your moves to outwit your opponent. In business, your opponent is the ever-changing market, and your moves are your strategies.
By studying sales estimates, you can spot market trends and understand your customers' preferences. Often, it feels like you have insider information that helps you make all the right moves.
6. A Business Health Check
You can use sales forecasts to measure how close your predictions are to what really happens.
It's a bit like comparing your estimated travel time to how long your road trip actually takes. This helps you find areas where you can do better and makes sure everyone is doing their part to reach the sales goals.
7. Getting Ready for the Unexpected
I’m not into surprises and I’m guessing you’re not, either. And sales forecasting helps you get ready for unexpected things that might happen.
By looking at how the market is doing, what customers are up to and other outside factors, you can spot potential problems and make backup plans. This way, if things don't go as expected, you have a safety net to catch you and keep your business going strong.
Sales Forecasting Methods
Now, there are a ton of different sales methods out there, but they boil down to these two categories: quantitative and qualitative techniques.
Qualitative methods work well when you’re just starting out and don’t have much historical data to draw from. It requires an expert – be it an industry expert or the customer – to come in and make a judgment call.
These methods include:
- Expert Opinion or Consensus Method: Gather industry experts or senior managers to discuss sales forecasts. For example, a pharmaceutical company consults experts to predict sales for a new drug based on factors like market size and competition.
- Delphi Method: Experts form a panel, and through group consensus, they develop forecasts. The group narrows down the range of answers and reaches a consensus.
- Consumer Survey Method: Collect information about consumer purchasing plans in the future. It's a direct way to forecast sales.
- Sales Force Estimate: Your own salespeople provide forecasts. It's sometimes called the grassroots approach.
- Sales Hierarchy Estimate: Sales forecasts come from different levels of the sales management team, from the field to corporate managers. It's also called a stepwise estimate.
On the other hand, quantitative techniques use math and statistics to make predictions based on historical data. Here's a quick rundown:
- Moving Averages: Calculate the average of past sales data to predict future sales and spot trends.
- Sales Ratio Method: Analyze trends in the sales ratio (current year sales divided by the previous year). It's all about spotting patterns.
- Market Share Projection: Estimate how much of the total market your business will capture in a specific period, often a year. It helps you understand your position in the market.
- Regression Analysis: Study the relationship between sales and other factors like advertising spending or customer demographics. That way, you have a better understanding of what influences your sales.
Steps to Calculate Sales Forecast
Calculating sales forecasts may sound complicated, but don't worry; I’ll break it down into simple steps, just like following a recipe!
Step 1. Set Your Goals
Before you start, figure out what you want to achieve with your sales forecast. Are you trying to spot trends, predict sales for current inventory and offers or see how outside events affect sales?
You also need to decide what timeframe you want to forecast. Your options are:
- Short-Term Forecasting: This method is like cooking up something quick and easy. It's for predicting sales in the near future, usually up to a year.
- Medium-Term Forecasting: A bit more like preparing a weekly meal plan. It covers sales for the next few years, typically up to three to five years.
- Long-Term Forecasting: Think of this as planning a big family feast months in advance. It looks at sales for the next 2-5 years.
Step 2. Get Your Data Together
To make a good forecast, you need to look back in time. That means you need to collect data from the past. Here, you have two options:
- Historical Sales Data: Start by collecting your past sales numbers. This could be monthly or yearly, depending on what you're forecasting.
- Market Data: Look beyond your own sales figures. What's happening in your industry? Are there trends, economic conditions or seasonal patterns that affect sales?
Step 3. Look at the Data
Now, dig into the data you collected. Try to find patterns and connections. You can rely on apps like PowerBI, Excel or GSheets. But many CRMs and accounting software have this function built-in, so I’d check them first.
Step 4. Make a Forecast Plan and Check It Over
Decide how you'll use math or any of the special methods mentioned above to make predictions.
Then, sanity-check your plan and do it regularly. Compare what your plan predicts with what really happened in the past. If they don't match, you might need to make some changes.
If your plan didn't work perfectly, don't worry. It happens to all of us – very few forecasts end up matching the budget (and vice versa). You can change it to make it better. Add new things or fix what's not working.
That’s what it’s here for!
Step 5. Make Your Predictions and Keep Evaluating
Now, you're ready to make your sales predictions using your plan! You'll figure out how much stuff you'll sell in the future. You can do this for different things and times, like each month or every three months.
Your sales forecast isn't a one-time thing; it's an ongoing process. Keep an eye on what's really happening with your sales. If your predictions are way off, go back to your plan and make it better.
Sales Forecast Calculator
When it comes to sales forecasting, it's not rocket science. The formula used is quite straightforward:
SF = (1 + AGR/100) * PS
Here's what each part means:
- SF stands for the sales forecast for the upcoming year.
- AGR is your average annual growth rate, expressed as a percentage (%).
- PS represents your previous year's sales.
To calculate your sales forecast, follow these simple steps:
- Take your AGR and divide it by 100.
- Add 1 to the result.
- Multiply this by your previous year's sales (PS).
Let's say your business brought in $100,000 in sales last year, and you anticipate a 10% average annual growth rate. Applying the formula looks like this:
AGR = 10% (0.10 when divided by 100)
SF = (1 + 0.10) * $100,000
SF = 1.10 * $100,000
SF = $110,000
So, your sales forecast for the next year would be $110,000.
Projected Sales Calculator
Now, let’s look at projected sales, which is basically predicting what you're going to sell based on what you’ve sold for a given period.
Here’s the monthly project sales formula:
MS = CR / D * 30.5
Here's the breakdown:
- MS represents your projected monthly sales revenue.
- CR is your current revenue.
- D is the number of days it took to reach your current revenue.
This formula will help you figure out your projected monthly sales. Then, if you want to project your yearly sales revenue, take that and use this formula:
YS = PMS * 12
- YS being the projected yearly sales revenue.
- PMS as the projected monthly sales revenue.
This formula helps you estimate your total sales over the span of a year based on your current revenue.
Let's assume your business raked in $15,000 in revenue over the past week, spanning seven days. To calculate your projected monthly sales:
MS = $15,000 / 7 * 30.5
MS ≈ $65,571.43
So, your projected monthly sales revenue is approximately $65,571.
To get the projected yearly sales revenue:
YS = $65,571 * 12
YS ≈ $786,857
Your projected yearly sales revenue would be approximately $786,857. Easy-peasy, right?
A Forecast of Success
With the sales forecast calculator and projected sales calculator, you have the tools to make these predictions. They're like magic wands that turn data into insights.
But remember, this isn't a one-time thing. Just like checking your map while driving, you'll want to keep an eye on your progress. If things aren't going as expected, you can adjust your course.
So, set your course, use your map and let sales forecasting be your compass to a brighter future!