How to do a sales forecast

A sales forecast estimates the income you expect from sales, usually month by month for the year ahead. business.gov.au notes that forecasts make a budget more accurate.

It is worth keeping distinct from the sales line in your budget. business.gov.au separates the two: a budget sets out what you aim to earn and spend, and a forecast projects the likely outcome from where the business stands now. Your budget might aim higher than the forecast. The gap between them shows how much your plans depend on doing better than the current trend.

Run your profit and loss statement month by month for the last year, or longer if you have it. Then:

• split sales into the lines you will forecast, such as product groups, services or types of customer
• mark one-off sales, such as a single large order, so they aren't repeated by accident
• note the months that are always busy or quiet, and by roughly how much
• note anything that changed during the year, such as a price rise or a new product, which makes earlier months less useful as a guide.

Forecast sales on the same basis as your profit and loss statement, so you can compare the two later. Under accrual accounting that means the month the sale is made, not the month it is paid for.

Rather than adding a guessed amount to last year's total, break each line into the things that produce it:

• a shop or online store: number of customers times average sale
• a product business: units sold times price
• a service business: billable hours times hourly rate, or jobs times average job value
• a business with a few large customers: each customer's expected orders, one by one.

Each driver can be checked against something real: customer counts from your sales records, prices from your price list, hours from your team's capacity. When a month comes in short, you can see which driver moved.

The shop line follows last year's pattern of a quieter August and a stronger September. The wholesale line is built customer by customer, and the new customer appears only from the month its orders are agreed to start, not the month it was first discussed.

History tells you what happened under last year's conditions. Adjust it for what you already know about the year ahead:

• price changes, and how customers might respond. business.gov.au notes that some products see a big change in demand when the price moves
• customers you have won or lost, and contracts starting or ending
• new products, and older lines you plan to stop selling
• limits on what you can supply, such as staff hours, stock or equipment
• changes in your market, such as a new competitor nearby.

A new business has no history to start from. business.gov.au suggests market research, and describes market testing as putting your product or service in front of some potential customers and asking what they pay for similar things and how many they would buy.

The sales forecast feeds your cash flow forecast, but the months don't line up when customers pay later. Move each sale to the month the money is expected, using the payment terms each group of customers is on.

The new wholesale customer adds to September's sales, but its money doesn't arrive until October.

Before you use the forecast for planning, make a cautious version and a hopeful version by changing the drivers you are least sure of. If the cautious version still covers your costs in each month, the plan has some room. If it doesn't, you know which months to watch.

Then compare each month's actual sales with the forecast, line by line. business.gov.au suggests updating forecasts more often than budgets, monthly or quarterly. Replace each finished month with the actual figure, look for the driver that caused any gap, and carry that lesson into the months ahead.