The Case for Sales Forecasting

Nothing happens until a sale is made. – Thomas Watson Sr.

Mr. Watson, the former CEO and chairman of IBM, was right, of course. So it would be nice to know when the sale will happen, meaning you can get past the “nothing” happening stage, and move toward growing your company.

Enter sales forecasting. A sales forecast is your best estimate of how much revenue your company, or a specific product or service, will generate over a specified time period. You’re likely already engaging in some form of sales forecasting, at least informally, but there are good reasons for taking the process more seriously.

Forecasting combines a little art, some science, and the input from key members of your company’s team. Effective sales forecasting doesn’t necessarily require special training or high level mathematics. The bottom line is that a sales forecast is an educated guess based on experience, the best current information you are able to obtain, and other factors (industry trends, seasonal influences, general economic activity, etc.) relevant to your situation.

Putting a Forecast Together

Books, articles and case studies have been written about sales forecasting, but after selecting the time period for the forecast (month, quarter, year), the process ultimately comes down to three factors:

  1. Estimating when a particular sale will hit the books (early March, end of Q1)
  2. Designating the dollar value of the sale (20 widgets x $250 = $5000)
  3. Assigning a probability to the sale (confident of the order, probability is 85%)

For this example, the $5000 can be multiplied by the 85% probability. The product of the calculation, $4250, can be added to the forecast for the first quarter. The same calculation should be applied to every potential order in your pipeline. The combined total of all these calculations is your sales forecast for the time period in question.

Depending on your situation, the process could take a few minutes or a series of meetings with your co-workers, but be sure to gather all the input you can. And insist on candor and honesty. No one likes surprises, bad or good. Potential sales that were assigned high probability but don’t come through can cause financial problems for the company and hurt morale. Sales that were assigned long-shot status but somehow materialize into actual orders can strain your company’s resources.

Why Bother?

If you have never ventured into sales forecasting, the process might seem like just another chore. And who needs that? But here’s some motivation: A solid sales forecast can tell you exactly what you should be doing during the forecast period. It’s that simple and that hard.

Your company’s priorities, relative to what your forecast tells you, can be divided into two categories:

  1. Cash Flow Considerations . Are projected sales for the quarter (or year) enough to cover payroll, administrative costs, rent, utilities, taxes, equipment, supplies and other expenses associated with your business? If so, you’re doing some things right, so stay the course. Knowing that you likely will have excess cash flow will give you time to consider exactly what to do with it. Significant equipment expenditures, additional personnel, or long-term investments can be considered.On the other hand, if you’re headed for a cash crunch, at least you won’t be blind-sided with bad news. You may not like where you are, but at least you’ll know where you are, and you’ll have time, thanks to your forecast, to take action. Can new customers be developed quickly enough to generate significant revenue? Can certain expenses be cut? Can lines of credit be tapped to cover the shortfall? If short-term cash problems are common, consider an invoice factoring service that will get funds to your bank account faster than the usual 30 to 45 days.
  2. Strategic Considerations. A detailed sales forecast can show you where you should focus your time and resources to ensure the numbers are made. Is a major account projected to bring 30% of the quarter’s revenue? Make sure the client is comfortable and do everything possible to make sure the sale won’t slide to the next quarter. Is one sales rep responsible for 70% of sales? Make sure he has the support he needs. And does your company have the capacity to fill the expected orders? That’s a question for your service or production team, but it illustrates how the forecast is relevant throughout your company.The forecast can also call your attention to opportunities in danger of being missed. Did your company quote on a project, but the possible sale is not included in the forecast? Find out why. Even if it’s too late to salvage the sale, at least you will learn something for next time around.

One last note on forecasting: Go easy on yourself. When it comes to sales forecasts, you don’t need to be perfect; you just need to be realistic and reasonable. Besides, you will get better at it over time.

MP Star Financial’s invoice factoring services can make your company’s cash flow more predictable, allowing you more time to run your business and grow your company.
Call MP Star Financial for more information at (800) 833-3765, extension 150.

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