Sales forecasts are predictions of how many products a business will sell in the future, based on data such as previous sales. Businesses can use many formulas to estimate information that can help them plan, operate and make decisions. If you run a business, consider calculating your sales forecast for the next month or year. In this article, we discuss the definition of a sales forecast formula, reasons it's important, steps for how to calculate it and provide some helpful examples.
What is a sales forecast formula?
A sales forecast formula is a method of predicting future sales for a company. It can guess profits, amount of customers, rate of deals and other information in a time period. There are various ways to calculate a sales forecast, but it often incorporates an examination of a company's historical data and the insights of their customer representatives. Sales forecasts can help a company better understand its fiscal health, show stakeholders its status and plan in advance to ensure it can remain operational for a long time.
Why is calculating a sales forecast formula important?
Calculating sales forecasts can help a business of any size gain a deeper, more detailed knowledge of its capacities. It can provide many other benefits to a company, such as:
Create financial documents: Sales forecast numbers can help a business create other financial documents, such as a profit-and-loss statement, cash flow statement and balance sheet. These records can be useful for understanding the success of a business and describing it to stakeholders or auditors.
Set realistic goals: If a business owner knows how many sales they're going to make, this may help them make business decisions such as how many employees to hire, how much money to spend on marketing or what products to sell. They can use evidence and intuition to try to make safe financial decisions that keep their business lucrative.
Make a smart budget: Since a business's profits are its revenue minus its expenses, a sales forecast estimating future revenue can help a business owner calculate their profits. They can then make a budget, being careful about what they spend to ensure it does not outweigh what they may earn.
Impress investors: Especially for a new business or startup company, sales forecasts can help convince investors to fund startup costs, operation costs and new equipment. Investors who see a positive sales forecast may have more confidence in the business's success.
Properly manage inventory: A business owner can look at their sales forecast to guess how much inventory they may need in the sales season. Planning the proper amount of supply can save money, time and effort, ensure customer satisfaction and minimize waste.
Grow operations: Sales forecasts can enable business owners to make decisions that can ultimately help them earn more profits. For example, if a business owner predicts a decrease in sales, they can change their product features to make them more competitive and desirable to consumers.
How to calculate a sales forecast
There are different techniques for forecasting sales, some more complex than others. Here are some simple steps for how to calculate a forecast for your business:
1. Track your business's data
In order to calculate sales forecast, it's important that you track your business's financial data, especially sales for each product by month. You can also track the number of sales that are returned or canceled to subtract those from actual sales. There are many online softwares that can help you track data, such as Customer Relationships Management (CRM) systems. These can be very helpful in calculating sales forecasts, understanding other business information and better interpreting your customer's priorities and tastes.
2. Determine your sales cycle and categories
Figure out which sales cycle or time period you would like to measure. This can be a month, quarter or year, depending on your definition of a sales period. Then, choose what to forecast. Instead of forecasting your entire company, or just one product, consider making categories of products to make the process easier. For example, if you own a restaurant, you could forecast how well you sell drinks versus entrees. You can adjust your categories based on what information you want to find.
3. Choose a forecasting method
Different methods for sales forecasting have varying purposes and processes. You can choose the right one for your business based on what your goals are and how many calculations you want to conduct. Here are some types of sales forecast formulas:
Opportunity stage forecasting: This method uses the probability of closing deals at each stage of a sales interaction, or the close rate of a company. The formula is "sales forecast = total value of current deals in sales cycle x close rate."
Intuitive forecasting: This method focuses on the sales rep's insights, and it's great for small businesses or startups which lack historical data. Business owners can just ask their sales reps when they think their deals will close and how much profit they might make.
Historical forecasting: This method uses historical data (results from previous sales cycles) and sales velocity (the rate at which sales increase over time). The formula is: previous month's sales x velocity = additional sales; and then: additional sales + previous month's rate = forecasted sales for next month.
Multivariable analysis: This method covers a variety of factors, including the probability of closing deals, sales cycles, sales reps insights and historical data. It includes complicated math, but you can make it easier by using CRM, forecasting or sales software.
Bottom-up approach: This method uses guesses for how many customers a company can reach. The formula is: sales forecast = estimated amount of customers x average value of customer purchases.
New business approach: This method is for new businesses and small startups that don't have any historical data. It uses sales forecasts of a similar business that sells similar products.
4. Use a formula to calculate
One of the simplest formulas for how to calculate sales forecast is calculating annual sales forecast, using a year as your time period. While this method assumes your sales are relatively stable, the math is more easy and quick than other strategies. First, come up with your average monthly sales rate based on your sales revenue so far. Then, use that to forecast the sales for the rest of the year. Add the sales from months so far to the estimated sales for the rest of the year to get your annual forecast. Here are the formulas to follow:
Total sales revenue so far / number of months so far = average monthly sales rate
Average monthly sales rate x number of months left in the year = Possible sales revenue for the rest of the year
Total sales revenue so far + possible sales revenue for the rest of the year = annual sales forecast
You can also just multiply your total sales from last year by the rate of inflation to guess your sales for the next year. The formula looks like this:
Total sales last year + (total sales last year x rate of inflation) = annual sales forecast
5. Keep in mind factors that may impact sales
While your sales forecast can be a good estimation to show investors or make business choices, your actual sales may change based on various external factors. Remember to round down when calculating your sales forecast and keep your numbers conservative so you don't over-estimate. You can also refine your sales forecast over time to make it more accurate and keep it up to date. Here are some factors that may impact your sales:
- Economic forecasts and conditions
- Price changes in raw materials
- Employee contract renegotiations
- New sales contracts
- Industry growth or shrinkage
- Increase or decrease in consumer buying power
- Political changes
- Changes in sales seasons
- Market shifts
- New marketing strategies
- Internal changes and decisions by management
Examples of sales forecast calculations
You can calculate sales forecast on a piece of paper or a computer, depending on what you want to measure. Here are some examples of sales forecast that may help you learn how to calculate it for yourself:
Jimmy started a farm two years ago, and he would like to calculate his sales forecast to show potential grant funders the success of his business. Starting in January and by May of 2021, he has made a total of $5,000 in revenue for the year. Here are his calculations:
- $5,000 / 5 = $1, 000 average monthly sales rate
- $1,000 x 7 = $7,000 possible sales revenue for the rest of the year
- $5,000 + $7,000 = $12,000 annual sales forecast
Sasha operates a coffee shop that also sells brunch. She would like to compare the annual sales forecast of her coffee drinks with her shop's food. Last year, she earned $45,000 for food sales and $55,000 in coffee sales, and the inflation rate is 0.5%. Here are her calculations:
- Food: $45,000 + ($45,000 x 0.005) = $45,225 annual sales forecast
- Coffee drinks: $55,000 + ($55,000 x 0.005) = $55,275 annual sales forecast
David started a small general store in April of this year. He's only been in operation one month, but he would like to calculate his sales forecast for the rest of the year. He's made $1,500 so far. Here, the number of months left in the year include May through December and January through March. Here are his calculations:
- $1,500 / 1 = $1,500 average monthly sales rate
- $1,500 x 11 = $16,500 possible sales revenue for the rest of the year
- $1,500 + $16,500 = $18,000 annual sales forecast