In business, you’re always selling something. Even if your company is the furthest thing from a storefront with cash registers and credit card readers — say, a consultancy that charges by the hour — you make a sale every time you earn money by providing goods or services. Of course, you also incur certain expenses to make these sales, so you’ll need to know ahead of time whether you’ll make enough sales to cover your costs. That’s where sales forecasting comes in.
Sales forecasting is the use of current and previous sales data to predict your team’s sales activity during an upcoming monthly, quarterly, semiannual or annual period. You can use sales forecasts to identify internal or external sales issues and resolve them with enough time remaining to reach sales goals.
Because a sales forecast is a prediction, it relies on current knowledge to preview upcoming changes. As such, the following factors influence sales forecasts:
Although sales forecasts extrapolate from current data, they are primarily concerned with future conditions. As a result, they constitute an integral part of your company’s larger sales plan and should be taken into account alongside your other expectations for the quarter or year.
Sales forecasting is an important financial planning tool and should be part of budgeting. It can also be used as a motivator for sales teams, setting a clear target for them to hit in a given period of time.
Creating a sales forecast involves basic math and thorough knowledge of your typical sales cycle (although newer companies may lack this information and should conduct research instead). Follow these steps to create a sales forecast:
Using the past to predict the future is essential to sales forecasting, but not all usage of past data is equal. Try one or more of these three prominent forecasting methods:
Note that each of these methods has advantages and disadvantages regarding data accuracy, external factors and other considerations. That said, they are more straightforward and reliable (and less technical) than other methods, so they may still be best for your sales forecasts.
This step may seem obvious, but a thorough sales forecast requires you to identify every item you’re selling. Excluding an item that you sell or including an item you’re no longer producing can lead to inaccurate sales forecasts.
Once you know what you’re selling, figure out your sales prices and the number of sales that you estimate will occur. The forecasting methods explained in step one can be used to quantify your sales. For example, the sale mentioned in the length-of-cycle example can be seen as a sale of 0.75 units.
Likewise, the $100,000 x 0.75 operation in the above length-of-cycle example shows how to multiply your prices and quantities. This step looks a bit different if you’re using historical forecasting; in that case, multiply your previous period’s sale quantity by its number of products sold.
Without taking sales costs into consideration, you can’t get a meaningful picture of your profit margins. That’s why you should also multiply the cost of making each sale by the number of sales.
For example, let’s say you use the historical forecasting method and predict sales for one month of $500,000 based on the previous month’s sales of 500 units at $1,000. Then, if each unit costs $100 to sell, your sales costs are 500 x $100 = $50,000. This means your profit forecast is $500,000 – $50,000 = $450,000.
Now that you’ve seen the basic math of sales forecasting, you might feel overwhelmed. Maybe you’re wondering whether you really have to calculate these numbers for all of your items. The answer is usually yes, though if your inventory is large and diverse, you may need to condense revenues and costs into larger categories, as shown in this sales forecast table.
To create a sales forecast, choose a forecasting method; determine your sales prices, quantitie, and costs; make some basic calculations; and consider your inventory.
Sales forecasting gives you the information you need to adjust your company’s upcoming sales strategies and budget. An accurate forecast can point to gaps in your sales team’s methodology; areas where sales costs can be cut; or increases, decreases and trends in your sales. It does so while giving you more than enough time to make these adjustments and remain on track to meet your sales goals.
In addition, a sales forecast gives your sales team a target to strive toward. In sales, staying motivated is critical, and if your sales forecast sets a target, your salespeople will keep their eye on it. That’s especially true if you tie some sort of incentive to beating the forecast for a given period of time, such as team bonuses or boosted commissions for sales that exceed predictions.
Here are some factors that may complicate your sales forecast:
Sales forecasts are predictive tools, and sometimes your team may fall short of predictions. If that happens, you should do two things: Analyze your forecasting methodology and review operations and market conditions for the period during which you missed the forecast.
First, take a closer look at your sales forecast and how you developed it. If it was grounded in lofty ambition rather than historical sales data, that may be a clear indicator that it wasn’t realistic. For example, if your team has historically brought in between $100,000 and $200,000 in revenue per quarter, suddenly expecting them to generate $500,000 without any demonstrable changes in operations is setting your team up to fail.
Similarly, if the sales forecast was built on a dependency that wasn’t met, that could explain the failure. For example, if your forecast was built on the premise that your marketing team would generate 20 percent more leads than it did in the previous period and the team only generated 5 percent more leads, it’s unlikely the resulting sales forecast could be met.
If your forecasting methodology appears sound — that is, it’s grounded in historical sales data and realistic assumptions about the upcoming period — take a look at market conditions. Has the economic landscape changed? For example, record inflation between 2021 and 2023 saw declines in consumer spending and reduced marketing budgets. Sales forecasts made before inflation impacted the broader economy are likely to miss the mark. In a case like this, it’s important to revise future sales forecasts once you understand why previous ones were not met.
Missing a sales forecast isn’t the end of the world, but you should analyze what caused your expectations to be off base and adjust future sales forecasts accordingly.
Sales forecasting is important not only for benchmarking a successful quarter or year for your sales team, but also giving them a clear goal or target to surpass. While meeting a sales forecast is an important goal in itself — especially when that forecast is based on historical sales data and expected lead generation — eclipsing it can be a mark of great success. Sales forecasting is not only an important financial planning tool, it’s also a great motivator to get more out of your sales team.
Jacob Bierer-Nielsen contributed to this article.