Business Sales Forecasting – Financial Planning

Analyzing Sales Data and Market Research for an Effective Forecast

Nov 2, 2009

Creating the sales forecast is an important financial analytical tool that gives the business direction for profitability and is the first step for creating a budget.

Many business professionals believe that creating a sales forecast is a waste of time. The general consensus of these adversaries is that the future is impossible to predict, so why even bother. A forecast is never 100% accurate because it’s an estimate of future sales activities. The sales forecast should not be considered a prediction of the future, but more of a tool to help maximize profitability.

The forecast is a report of future revenue and income expectations and is the first step toward creating a budget. All future sources of income are projected and usually separated by revenue categories. Generally a forecast is based on the same revenue GL accounts that are listed on the income statement. For better analysis, the forecast may have different income categories than what’s reported on the income statement.

Creating and Formatting the Sales Forecast

The sales forecast is actually a future estimate of the revenue section of the income statement. Since the goal is to estimate the revenue portion of the income statement, the easiest method for creating and formatting the forecast is to mirror the sales and gross profits from the income statement. Create a template that actually lists the GL sales accounts, gross profit and other income the same way it’s listed on the income statement.

Historical Sales Data and the Sales Forecast

The first step to creating a forecast is to gather historical data. The income statement is the basic tool for gathering historical data. The first step to creating an effective forecast is to gather historical information from previous income statements. Compare previous years and look for trends in the various sales categories. Negative or positive trends from year to year should be factored into the forecast.

Current Expectations and the Sales Forecast

Current expectations are external and internal factors that may affect sales and gross profit projections. Historical data is only a measure of past performance. There can be other underlying external, as well as internal factors that can have an affect on future projections. There can be many external factors that can affect a forecast. Some examples of external factors are:

Internal factors such as policy changes or personnel changes can also affect profit expectations. Once external and internal factors are analyzed, they should be factored into the historical data and the forecast should be adjusted to reflect current expectations.

The sales forecast should be analyzed and compared to the actual outcomes at least monthly, if not weekly. Changes should be made to the forecast as economic conditions warrant. If there’s a significant difference from actual outcomes, further analyses should be performed and adjustments made as necessary. The next step, after the creation of the forecast, is the creation of the budget.

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