Business Dictionary defines forecasting as a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on past and present data, and trend analysis. In other words: predicting the future. For merchants, of course, this boils down to predicting sales.
Many small businesses don’t think investing in forecasting early on is essential, but in fact, it can be a big help in determining performance, and predicting and maintaining future growth.
If you’ve ever looked at last month’s revenue to gauge how much you’ll make the next month, then you’ve already started forecasting. In this blog article, we’ll walk you through the basic forecasting process and suggest resources for going further with more in-depth forecasting. How much you can forecast is ultimately determined by the amount of data you have, so if you’ve been in business for 3 years, your sales forecast will be more accurate and comprehensive than someone who has been in business for 3 months.
No History Forecast
Most businesses starting out will establish this type of forecast. This is a critical step in building a business plan and an important factor that potential investors will consider. With no data, this forecast is pretty much just a guess. But you can use relevant information to make an educated guess. Research your industry and similar companies you’d like to emulate. Understanding how others in your field have performed can help you gauge how your own business will perform. Other considerations include:
- Your track record (How successful were your previous ventures?)
- Partner’s success rate (Are you bringing someone on board with a better success rate?)
- Product Demand (Compare purchasing behavior and purchasing funnel)
Your local chamber of commerce and other small business organizations can help you with your projection based on their experience with similar companies. The more research you have, the more accurate your predictions will be.
1 Month History Forecast
Once you’ve made your first month’s sales, it’s easy to guess what the next month will look like. Barring any major fluke events, this method will give you a ballpark sales figure. Unfortunately, it’s not always a very reliable method. An obvious example is the holiday season: if you make $1500 in sales during the holiday season, you can’t reasonably expect to maintain the same level of sales in the months after; the holidays are an unusual event in the ecommerce sales year that tend to show increased sales. So remember, this forecast can give you a general idea of sales, but you’ll need to take context into account.
3-Month History Forecast
Collecting data for several months will give you a more accurate forecast by allowing you to average your sales across this period. You’ll also have enough data to start seeing trends. Here’s a short video on creating a
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1-Year History Forecast
If you continue to plot your sales throughout the year, you’ll start to see a clearer sales trajectory. However, you might also notice clear rises and drops in sales across different seasons. This is mostly due to high sales seasons around the holidays and the lack of sales during slow seasons like summer. In forecasting, this is called seasonality. To forecast next quarter’s sales, calculate the annual average and sales averages for each of the quarters. Now divide each quarter’s sales by the average. Next, estimate the amount you expect to make the following year. Take that prediction and multiply it by the effect seasonality plays on your business. The result is the estimated quarterly sales.
See below for an example using 11.8% annual growth.
For another approach, check out this Forbes’ how to article.
Multi-year History Forecasting
Once you collect data across multiple years, you’ll see that you no longer have to estimate the following year’s growth. You’ll be able to solve for that using previous years’ numbers, essentially removing almost the guesswork in your forecast. Once you accumulate that data, we recommend creating an excel spreadsheet with all your sales information. Then use built in functions to create a table that will automatically provide sales information. We suggest reading this article on creating a rolling forecast of seasonal sales in Excel. Again, it will require that you have extensive data to feed into the spreadsheet. Once you do, you’ll have a pretty accurate projection for next month’s sales.
Why Small Businesses Should Forecast
If you’re just starting out, forecasting sales is a critical step in putting together your business plan. Once you’ve been in business for some time, it’s forecasting is useful to predict sales. However, forecasting can be great tool for many other business functions:
- Forecasting expenses
- Inventory reordering
- Product performance (new products)
- Evaluate new marketing efforts
- Revenue forecast (Sales - expenses)
Flawed Forecasts
Keep in mind that with any predictions, there are some underlying assumptions you may take for granted. Forecasts do not account for extenuating circumstances like natural disasters or any crashes in the overall market or even your industry. Keep in mind that forecasts provide numbers; it’s up to you to interpret the information correctly.
Start forecasting your holidays sales today. Then surpass your sales projections by checking out these 7 ways to boost Christmas Sales.
