How to Make a Simple Sales Forecast for a Small Business

Ask a small business owner how much they will sell next month and the answer is usually a hope with a number attached. Then stock is ordered, staff are scheduled and rent is paid on the strength of that hope. A simple sales forecast replaces it with an estimate you can explain, check and improve. It takes an hour to set up.

What a forecast is for

• Stock and purchasing. How much to order, and when.
• Staffing. Whether to add a shift or a person.
• Cash. Whether next month's income covers salaries, rent and suppliers.
• Targets. A reference to judge the month against.

A forecast will be wrong. A useful one is wrong by a small, shrinking amount, and you know why.

Method 1: from history

If you have at least a year of monthly sales, start here.

1. List monthly sales for the past twelve to twenty-four months.
2. Look at the same month last year. This captures seasonality.
3. Work out the growth rate: compare the last three months with the same three months a year earlier.
4. Forecast: same month last year, adjusted by the growth rate.

Example: last November you sold 80 million. The last three months are running 15% above the same months last year. A first forecast for this November is 92 million.

Then adjust for things you know: a planned promotion, a holiday that falls in a different week, a large customer who left, a new product.

This method is simple and works for stable businesses. It is slow to notice a change of direction.

Method 2: from the pipeline

If you sell through quotations and deals, your pipeline predicts the near future better than history does.

1. List open deals with their value and stage.
2. Apply your win rate for each stage. If you win three in ten deals once a quotation has been sent, each such deal counts at 30% of its value.
3. Add them up, including only deals likely to close in the period.

Example:

• Four deals at quotation stage, total 60 million, win rate 30%: 18 million.
• Two deals in negotiation, total 40 million, win rate 60%: 24 million.
• Expected from current pipeline: 42 million.

Add expected sales from enquiries that have not arrived yet. Use the average number of new deals per week and their typical value and win rate.

The win rates must come from your own records. Count how many deals that reached each stage were eventually won over the last six months. Guessing them makes the forecast a wish again.

Method 3: from capacity and activity

Useful for service businesses and for new ones.

• Capacity. A workshop with three technicians can complete a certain number of jobs a week. Sales cannot exceed capacity times average job value, whatever the demand.
• Activity. Enquiries per week, times conversion rate, times average order value.

Example: 120 enquiries a month, 25% convert, average order 600 thousand. Forecast: 18 million.

This method shows which lever matters. If conversion rises from 25% to 30%, sales rise by a fifth without a single extra enquiry.

Use more than one

Run two methods and compare. If history says 92 million and the pipeline says 60 million, something has changed, and it is better to find out now. The gap itself is information.

Give three figures instead of one:

• Cautious. What you are nearly certain to reach.
• Expected. Your best estimate.
• Stretch. What a good month could bring.

Plan costs on the cautious figure and stock on the expected one.

Break it down

A single total hides what is happening. Split the forecast by whatever drives your business:

• Product line or service type.
• Channel: store, online, wholesale.
• Existing customers and new ones.

Repeat orders from existing customers are usually more predictable than new business. Forecasting them separately makes the total more reliable.

Check it every month

This step turns a guess into a skill.

1. At month end, write actual sales next to the forecast.
2. Calculate the difference in percent.
3. Find the main reason: a large deal slipped, a promotion worked better than expected, stock ran out.
4. Adjust the assumptions for next month.

After three or four months you will know whether you tend to forecast high or low, and by how much.

Common mistakes

• Forecasting the target. A target is what you want. A forecast is what you expect.
• Counting every open deal at full value.
• Ignoring seasonality.
• Forgetting capacity and stock. You cannot sell what you cannot deliver.
• Never comparing with actuals.
• One person's optimism. Ask a second person to challenge the assumptions.

From sales forecast to cash forecast

Sales and cash are different. If customers pay thirty days after invoicing, this month's sales are next month's cash. Once you have a sales forecast, shift it by your usual payment delay and set it against the payments you must make. This is often where the forecast proves its worth, by revealing a tight month before it arrives.

Where tools help

A spreadsheet is enough to begin. The harder part is keeping the inputs current: deal values, stages and close dates. When the pipeline lives in a CRM that salespeople use daily, the pipeline method needs no extra work. Polynusa keeps the pipeline, invoices and bookkeeping in one workspace, so that deals, sales and cash can be read together. Plans are on the pricing page.

Summary

Forecast from history, from the pipeline with real win rates, or from capacity and activity, and compare at least two. Give a cautious, expected and stretch figure. Split by product and by new versus repeat customers. Check against actual sales every month and adjust.

FAQ

How accurate should a sales forecast be?

For a small business, being within ten to twenty percent of the actual figure is useful. The aim is to make better decisions about stock, hiring and cash, not to predict exactly. Accuracy improves each month when you compare the forecast with what happened.

What if the business is new and has no history?

Forecast from activity. Estimate how many enquiries you can generate, what share become customers and the average order value. Start with cautious assumptions, then replace them with real figures as soon as you have a few weeks of data.

How far ahead should a small business forecast?

Three months in detail and twelve months in outline. The next three months guide purchasing and cash decisions. The yearly outline shows seasonal peaks and whether the business is on course for its target.