Sales Forecasting: A Critical Discipline for Business Success
Forecasting sales for any business is an art, not a science, but is a critical discipline that business owners, in collaboration with the CFO, use to create operating plans and make informed management decisions. Sales forecasts estimate future sales volumes over a specified period of time, and they are essential to tracking and managing company performance. The sales forecast is the starting point for the operating budget that drives capacity planning, production, direct materials investments, labor investments, capital budgets, and more. As Jim McKinney of FocusCFO states, “Forecasts help to shape and drive the implementation of the company’s strategy. Forecasts should be monitored and compared to actual results as the company’s future strategies are planned and implemented.”
Know Thy Best Customers
The CFO begins the forecast by evaluating the company’s best customers. Using KPIs for the business, a definition of the company’s ideal customer can be created based on acquisition and maintenance costs, longevity, growth potential, overall profitability, or other factors.
Understand Your Market
The sales and marketing plan should consider the market size of these ideal customers and other targeted segments of customers, how and where to reach them, and how much can be spent on sales and marketing efforts. This information will help to create an estimate of how many new customers can be acquired in a given timeframe. When considering the sales and marketing budget, assumptions will have to be made about how much it will cost to acquire each customer. For example, if it takes $1 of marketing and sales to acquire one customer, how many customers will potentially be acquired over time based on the amount of resources available? The plan and the forecasts should also differentiate between the number of customers the business wants and the customers the business will be able to win.
Projecting Sales
Next, the CFO will analyze the mix of products and services these customers will buy, and how much revenue will be generated from each customer from different sources:
- New Business
- Up-Selling
- Retention/Contract renewals
- Cross-Selling different products
- Referrals
By projecting the number of current customers and potential new customers who will buy products, and how much revenue each customer is expected to generate, the foundation of a sales forecast can be created. Sales forecasts also must be based on historical trends and current initiatives, as well as external factors, such as market and industry trends. Seasonal factors that influence buying patterns need to be considered as well, in addition to the general buying behavior of customers.
Forecast Modeling
The CFO can use systems and processes that will streamline the analysis of all these factors and create a sales forecasting model specific to the business. Models can also be built to create balance sheets and cash flow projections. Effective forecasting provides key leadership insights that will drive strategic management decisions throughout the year.
