Sales forecasting is critically important to achieving accuracy in financial modeling and business planning. Sales forecasting is the process a business uses to predict future sales and revenue. Accurate sales forecasting helps a business owner make informed decisions about production/capacity planning, staffing, and inventory levels. Accurate sales forecasting is one of the most critical factors in predicting revenue growth and the cash required to operate the business into the future. What are the early warning signs of financial distress?
There are seven basic steps to prepare a sales forecast:
- Gather historical sales data: Historical sales data comes from a variety of sources, such as sales reports, previous sales invoices, and customer data. Gather the historical sales data for the products or services you want to forecast.
- Choose a forecasting method: There are several methods for forecasting sales, including time series analysis, regression analysis, and judgmental forecasting. Choose a method that works best for your business. A good sales forecast should allow you to understand what exactly must be accomplished to achieve the forecast.
- Identify relevant factors: Consider any external factors that may impact your sales, such as the economy, consumer trends, and competition. Also consider internal factors, such as changes in your product offerings or marketing strategies.
- Prepare the data: Clean and prepare the historical sales data for analysis. This may include adjusting for seasonality or trends or removing outliers.
- Apply the forecasting method: Use the chosen forecasting method to analyze the historical sales data and generate a sales forecast.
- Review and refine the forecast: Professional judgement must be applied to make the sales forecast accurate, relevant, and achievable. Adjust based on new information or changes in circumstances.
- Monitor and update the forecast: Regularly update the sales forecast as new data becomes available. At a minimum, sales forecast should be updated monthly and oftentimes its valuable to update it several times each month.
A high-quality sales forecast endeavors to predict sales to plus or minus 5% accuracy. Sales forecasting is critically important to effective financial modeling. It’s important to note that sales forecasting is not an exact science, and the accuracy of the forecast will depend on the quality of the data and the method used. However, with the right approach and tools, a business owner can develop accurate and useful sales forecasts to support their decision-making and planning processes.
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