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Small business: how to create a sales forecast

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Nobody knows the future. But you can take steps to prepare your small business to deal with that same future. One of the ways to do this is by having a sales forecast. Why is a sales forecast important? Because it helps business owners to determine:

Forecasting does not equal knowing the future.

For small business owners, whether you are doing manufacturing, retail or consulting, sales forecasting is not hard. There are some steps that you need to know and follow. Use this to get more control of your business and get in the driver’s seat of your business strategy and growth.

1. Create sales categories for your small business

Categories are groups of similar products or services. If you sell retail, some categories may be beverages, clothing, snacks, and baby products. If you have a car repair shop, some of your categories may be repairs, car parts, and car cleaning services. If you are a consultant, your categories might cover the types of services you offer, like consulting, training, or graphic design products.

2. Collect your business data from previous years

If you record sales information, collect your data from the last 1 – 2 years. For each product (or service), collect the following information:

  • how many you sold in each month
  • the price you sold it for. If your price changed during the month, use the average price.
  • whether you took any action to boost sales in that month. For example, whether you had a marketing campaign.

When you are finished, it should be similar to this (I only did up to March).

Category Product Price Jan   Feb   Mar   Total yearly sales
Beverages     Units sold Sales amount Units sold Sales amount Units sold Sales amount  
  Tea 4 40 160 30 120 40 160  
  Coca Cola 2 90 180 70 140 100 200  
  Biscuits 1 5 5 10 10 15 15  
  Chips 0.5 5 2.5 5 2.5 10 5  
Total sales per month       347.50   272.50   380.00  
                  1 000.00
Example of sales data

If you have no way whatsoever to get data from previous years, you will have to guess. For example, based on what you have been able to sell so far. Note: If you have not been recording data up to now, start doing so today! It will help your business.

The main reason to record data is so that you can start seeing and understanding patterns. For example: if your business did really well in sales last year February, April, and December, why is that? Maybe you were lucky. Maybe it always happens in these months. Maybe something happened on the market that caused it. Data will help you understand what is happening and why.

3. Create a unit sales forecast

Once again, if you keep records, your business data will help you here.

Monthly unit sales from last year

From your data in step 2, you know how many products or services you sold in each month. This is the number of products (or services) that you sold, not the sales amount. Add them according to categories.

This year’s unit sales forecast

Then, create the new estimate for the coming year. Do you think you will be able to sell the same amount each month? Will you be able to increase your sales per month?

Unit sales increase

If you have the data from previous years, this will help you here too. Look at the unit sales from month to month. What was the percentage of increase?

Month Number of products sold Increase in number of units Percentage increase*
January 500    
February 600 100 20%
March 650 50 8.3%
April 750 100 15%
Average % increase     14.4%
How to calculate percentage increases

*  calculation of percentage increase: (month n+ 1 minus month n) divided by month n times 100. So, for February:

  • 600 – 500 = 100
  • 100 / 500 = 0.2
  • 0.2 x 100 = 20 (percent)

You can now decide to increase your monthly unit sales for 2021 by either the actual percentages from last year, or the average percentage. However, you should not do this unless you have a marketing strategy in place to increase sales.

When you are finished, your unit sales forecast for this year may look like this (up to June).

Category Product Jan Feb Mar Apr May Jun
Beverages  Product  Units sold   Units sold   Units sold   Units sold   Units sold   Units sold
  Tea 50 35 50 45 55 40
  Coca Cola 100 75 125 120 90 90
  Biscuits 10 15 15 10 20 25
  Chips 5 7 10 15 15 10
Example of a unit sales forecast

If you just started doing business

If you have just started your business and you do not have records, use any information that you have at this time.

For example: you started last month and you were able to sell 10 products. Try to sell an additional 1 or 2 products every month. Then start doing marketing and keeping records. If you find out that you are able to add 5 products every month, adjust your forecast.

If you do not have any data whatsoever, you will need to guess and monitor actual data to make adjustments.

If you are introducing new products

If you are introducing new products this year, look for similar products and use that as an estimate. If you are starting a new business, try to do some market research. Can you find out from other sellers how much they sell in on average, in a bad month, in a good month? They may not want to share this information, but try to get an idea.

If you have chambers of commerce or business associations in your city or country, try to get information from there. Or even from government ministries.

4. Review your prices

Consider your prices from last year. Are they the same prices you will be charging this year? When looking at the prices, do not forget to take account of inflation. Inflation means that your money is losing value every year. For example: if you sold a product for USD 10 last year and inflation is 10%, this year you will have to sell it for USD 11 (10% increase) to cover inflation. If not, your business starts losing money. Why?

Because due to inflation, other prices will also increase. Like gas, daily necessities and clothing. (Or you may see reduced quantities. For example, less fish today for the same USD 10 from last year). This means that you need more money to be able to buy the same things.

When you are doing your sales forecast, find out the inflation in your country and decide whether to add the full amount to your prices. If you do not have inflation forecasts for the coming year, you can use the inflation from last year. Or even the average inflation from the past 2 – 3 years.

It may be that you are competing 100% on price. If so, you need to start looking for ways to compete on other things because unless you are very big, your business cannot survive if you only compete on price.

5. Calculate your sales forecast

The next step is easy. Multiply the estimated monthly 1unit sales and the price to get the sales forecast per month. Add it up to get the sales per year. Your forecast for the coming year is now ready. Using the example I gave in step 2, your sales forecast may look like this (up to March).

Category Product Price Jan   Feb   Mar   Total yearly sales
Beverages     Units sold Sales amount Units sold Sales amount Units sold Sales amount  
  Tea 4 50 200 35 140 50 200  
  Coca Cola 2 100 200 75 150 125 250  
  Biscuits 1 10 10 15 15 15 15  
  Chips 0.5 5 2.5 7 3.5 10 5  
Total sales per month       412.50   308.50   470.00  
                  1 191.00
Example of a sales forecast

Whether you have been in business for many years, whether you are just starting your business, or whether you are just starting to keep records, one thing is certain. You need to closely monitor how your sales are developing.

If you sell less or more than expected

Are you selling less than you estimated? Take action by doing more marketing. Or, consider whether to reduce inventory of certain products so you can focus on products that are doing well. Make adjustments to your forecast as needed.

Manage your inventory

Your sales forecast will also help you to determine how much you need to have in stock. This can help you improve your inventory management. If you see that in certain months 1 of your products always does well, you will know to have more of that product in stock. If you see that certain products are not doing well, you can reduce your inventory.

Determine your marketing strategy

Your sales forecast can also help to determine your marketing strategy. The same example: in certain months 1 of your products is doing well. Why not do additional marketing for that product in those months so you can sell even more? Why not look for ways to package the product together with other products to increase overall sales?

It is a good idea to do sales forecast at the end of every year. So, in December 2021 you will create your sales forecast for 2022.

But forecasts are not something you do one time and forget about it. When you are driving a car or even if you are on foot on the road, you need to make constant adjustments based on what is happening.

It is the same in business. You will need to keep making adjustments. The good thing is that the adjustments will give you information about how you are doing, you will start recognising patterns and knowing how to respond. This will help you become more relaxed about managing your business.

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