Sales forecasting is a self-assessment tool for a company. You have to keep taking the pulse of your company to know how healthy it is. A sales forecast reports, graphs and analyzes the pulse of your business. It can make the difference between just surviving and being highly successful in business. It is a vital cornerstone of a company's budget. The future direction of the company may rest on the accuracy of your sales forecasting.

Companies that implement accurate sales forecasting processes realize important benefits such as:

Enhanced cash flow Knowing when and how much to buy In-depth knowledge of customers and the products they order The ability to plan for production and capacity The ability to identify the pattern or trend of sales Determine the value of a business above the value of its current assets Ability to determine the expected return on investment

The combination of these benefits may result in:

Increased revenue Increased customer retention Decreased costs Increased efficiency

For sales forecasting to be valuable to your business, it must not be treated as an isolated exercise. Rather, it must be integrated into all facets of your organization.

Think of your sales forecast as an educated guess. Forecasting takes good working knowledge of your business, not advanced degrees or complex mathematics. It's much more art than science.

The research for a good forecast is almost always harder than the final process of actually making the educated guesses. Your business size can determine whether your forecast may be simple or detailed. When the research is already done, the mechanics of sales forecasting are relatively simple.

Forecasting is usually easier when you break your sales down into manageable parts and then forecast the parts. Estimate your sales by product line, month by month, and then add the product lines for all months. Typically you'll need to project monthly sales for the next 12 months and annual sales for the following three years.

SALES FORCASTING TECHNIQUES

These steps for developing a sales forecast can be applied to most kinds of businesses:

Step 1: Develop a customer profile and determine the trends in your industry.

Make some basic assumptions about the customers in your target market. Experienced

business people will tell you that a good rule of thumb is that 20% of your customers

account for 80% of your sales. If you can identify this 20% you can begin to develop a

profile of your principal markets.

Sample customer profiles:

male, ages 20-34, professional, middle income, fitness conscious.

Young families, parents 25 to 39, middle income, home owners

Small to medium sized magazine and book publishers with sales from $500,000 to

$2,000,000

Determine trends by talking to trade suppliers about what is selling well and what is not.

Check out recent copies of your industry's trade magazines. Search the Business

Periodicals Index (found in larger libraries) for articles related to your type of business.

Step 2: Establish the approximate size and location of your planned trading area.

Use available statistics to determine the general characteristics of this area. Use local

sources to determine unique characteristics about your trading area.

How far will your average customer travel to buy from your shop? Where do you intend

to distribute or promote your product? This is your trading area.

Estimating the number of individuals or households can be done with little difficulty

using statistics census data. Statistics family expenditure survey can identify what the

average household spends on goods and services. Information on planned construction is

available from a variety of sources. Directories the Yellow Pages can help identify names

of companies located in your trading area.

Neighborhood business owners, the local Chamber of Commerce, the Government Agent

and the community newspaper are some sources that can give you insight into unique

characteristics of your area.

Step 3: List and profile competitors selling in your trading area.

Get out on the street and study your competitors. Visit their stores or the locations where

their product is offered. Analyze the location, customer volumes, traffic patterns, hours of

operation, busy periods, prices, quality of their goods and services, product lines carried,

promotional techniques, positioning, product catalogues and other handouts. If feasible,

talk to customers and sales staff.

Step 4: Use your research to estimate your sales on a monthly basis for your first

year.

The basis for your sales forecast can be the average monthly sales of a similar-sized

competitor's operations who is operating in a similar market It is recommended that you

make adjustments for this year’s predicted trend for the industry. Be sure to reduce your

figures by a start-up year factor of about 50% a month for the start-up months.

Consider how well your competition satisfies the needs of potential customers in your

trading area. Determine how you fit in to this picture and what niche you plan to fill. Will

you offer a better location, convenience, a better price, later hours, better quality, better

service?

Consider population and economic growth in your trading area.

Using your research, make an educated guess at your market share. If possible, express

this as the number of customers you can hope to attract. You may want to keep it

conservative and reduce your figure by approximately 15%.

Prepare sales estimates month by month. Be sure to assess how seasonal your business is

and consider your start up months.

How to conduct a Sales Forecast for a New BusinessStatistics show that 80 percent of new business startups never survive the first three

years. Nine out of 10 of those business failures are caused by poor management

decisions. Implementing sales forecasting forces a new business to base decisions on

facts rather than hunches. Since you have no historical information on your new business,

i.e., past sales, you need to look elsewhere.

You need to consider the following:

1. How well does your competition satisfy the needs of its potential customers?

2. Note the population and economic growth in your location.

3. Develop a customer profile.

4. Experienced business people will tell you that a good rule of thumb is that 20

percent of your customers account for 80 percent of your sales. If you can identify

this 20 percent, you can begin to develop a profile of your main markets.

After you've identified your primary markets, then you need to determine trends in your

industry. Now you need to know the approximate size and location of your planned

trading area. Your trading area is how far your average customer will travel to shop, as

well as how far you are prepared to distribute and promote your product or service. It is

helpful to recognize the personality of your trading area, which can be found by talking to

other neighborhood business owners, contacting the Chamber of Commerce, and reading

the local papers.

At this point, you should be able to estimate your sales on a monthly basis for a year. The

basis for your sales forecast could be the average monthly sales of a few similar-sized

competitors that are operating in a similar market.

To estimate their sales, you have to list, profile and study your competitors. This is

accomplished by visiting either their stores or the stores where their products are offered.

You need to analyze their customer volumes, the location, hours of operation, traffic

patterns, busy periods, quality of their goods and services, prices, product lines carried,

promotional techniques, positioning, product catalogues and other handouts. If possible,

talk to customers and sales staff.

What to look for, Market research should investigate four areas: customers, customer needs, competition, and trends. The research conducted should answer questions like:

Customers. Identify their:

Age Income Occupation Family size Marital status Residence Interests and hobbies

Customers wants

Is the product needed for a limited time (diapers, for example)? Are customers looking for quicker service? Do customers want guarantees with the products? Will customer come frequently (for example a grocery store) or seldom (a car

dealership)? Are customers looking for a wider distribution or more convenient locations?

Competition

What is the competitions' market share? How much sales volume do they do? How many similar firms exist? What attracts customers to them? What strengths do they advertise?

Trends. Are there:

Population shifts? (Baby boom, for example) Legal or regulatory developments? Changes in the local economic situation? Lifestyle changes? (single parents, working women, smaller family size)