Sales are crucial for every business’s survival. The revenue earned helps create the company’s future plans, pay overheads, and build business-customer relationships. However, selling your products or services is easier said than done.
Before marketing your products or services, you must understand the market trends, competition level, and product demand. Otherwise, you’ll end up in either of the following situations:
- Excess inventory, leading to a loss in revenue.
- Inventory shortage, leading to customer dissatisfaction.
In both these scenarios, you are likely to bear massive losses. To avoid such circumstances, it is highly recommended to make sales forecasts. Let’s learn about the same in detail!
What Is Sales Forecasting?
It is the process of making well-informed decisions by projecting future sales or deals of the company. It is generally based on previous sales data, economic trends, and industry standards. It helps the entrepreneurs to manage inventory, staff, cash flow, and other necessary resources that directly or indirectly affect the business’s sales or revenue.
Needless to say, as the majority of the forecast is based on the previous data, it is challenging for startups to create an accurate forecast in the beginning years. Startups typically have to rely upon the market and industry research to create a baseline to work with.
How To Create Sales Forecasts?
To create sales forecasts, you need to learn about the total cost incurred to produce and sell your goods and services. In addition to this, you also need to calculate estimated profit for a set period of time. The general steps you can follow to create sales forecasts are as follows:
- Create a list of goods and services your company deals with.
- Evaluate how much of each product or service you expect to sell in the specified period.
- Define the value of each product or service- in unit or dollar value.
- Multiply the unit number of sales by value. It will provide you with total sales.
- Determine the total cost of production.
- Subtract the total cost from total sales.
It is the easiest way to calculate the sales forecast and make future decisions accordingly.
Should You Forecast In Units Or Dollars?
As mentioned above, you have to define the value of each product or service in units or dollars. It might seem an easy task; however, it can get pretty complicated if you do not understand the difference between unit and dollar value.
The term “unit” refers to the product you are selling. Suppose your business sells different beverages such as soft drinks, juices, or liquor. In that case, these different categories of beverages will be termed a unit. Forecast by units is more effective and accurate as you can easily calculate the total number of units.
If you consider using this method, it would be wise to get in touch with a wholesaler. Continuing the above example, if you work with a wholesaler of Alcoholic drinks, you never run out of stock. It will also help you provide better customer service and reduce the cost of production. In a nutshell, your revenue will elevate.
Not to forget, it will also allow you to evaluate your previous plan and take necessary steps during the next month or year’s prediction.
On the other hand, if you forecast by dollar value, the number of products does not matter. Here, you’ll work with the total amount of money spent at a particular time. Know that this amount tends to vary according to the market trends, competition level, and demand. Thus, the chances of error are higher as compared to unit-based forecasts. It is usually preferred by businesses that sell services instead of products. Calculating the total service value is much more feasible than the number of units.
How Does It Benefit Your Business?
The sales forecast is basically the groundwork that you need to do before working on other financial aspects of your business. Estimated sales and production costs play a significant role in creating a cash flow statement, profit and loss statement (also known as an income statement), and balance sheet. In addition to this, you can reap the following benefits:
- Set Clear Company Objectives
Determining the cost of production and expenses will help you get better insight into the company’s future. This will allow you to create realistic and attainable goals or objectives for the company.
You’ll also get the answers to the following questions:
- What do you desire to accomplish in the next month or year?
- How many customers can you efficiently serve?
- What is your customer retention rate after a certain time period?
- How much should you spend on creating quality products or services?
Answers to these questions will further help you learn about any loopholes that you might have in your business plan and make necessary changes.
- Attracting Potential Investors
When a firm is operating smoothly, has a low cost of production, and satisfied customers, the investors are likely to invest in it. A clear sales forecast helps create such an image in the mind of potential investors. It will depict the company’s current position, performance, and future goals.
Not only investors, when a company has clear goals, but its employees and third parties are also likely to seek benefits from the company’s growth. All in all, it will help improve the efficiency of the company.
- Use Of Forecast To Create Budget
Your sales projection also serves as a reference for how much you should spend. Using the estimate will help you determine the amount spent on operations and administration to seamless working and marketing to attract new customers. It will ensure that you earn good revenue and make your business successful.
Likewise, if you are trying to expand your business, you have to reduce the overall expenses and sell more to earn higher profits. Lowering costs will become relatively easy when you know the product demand and customer expectations.
To Sum It All Up!
The sales forecast is a great way to help your business make sound decisions. It will ensure that you make revenue while your customers are also satisfied with your product and service. Not to mention, it will provide you valuable insights about your industry, competitors, and company, eventually helping your company succeed.