How Sales Forecasting Works

Sales are the lifeblood of a business. It's what helps you pay employees, cover operating expenses, buy more inventory, market new products and attract more investors. Sales forecasting is a crucial part of the financial planning of a business. It's a self-assessment tool that uses past and current sales statistics to intelligently predict future performance.

With an accurate sales forecast in hand, you can plan for the future. If your sales forecast says that during December you make 30 percent of your yearly sales, then you need to ramp up manufacturing in September to prepare for the rush. It might also be smart to invest in more seasonal salespeople and start a targeted marketing campaign right after Thanksgiving. One simple sales forecast can inform every other aspect of your business.

Sales forecasts are also an important part of starting a new business. Almost all new businesses need loans or start-up capital to purchase everything necessary to get off the ground: office space, equipment, inventory, employee salaries and marketing. You can't just walk into a bank with a bright idea and lots of enthusiasm. You need to show them numbers that prove your business is viable. In other words, you need a business plan.

A central part of that business plan will be the sales forecast. Since you won't have any past sales numbers to work with, you'll have to do research about related businesses that operate in the same geographical market with a similar customer base. You'll have to make concessions for the difficulty of starting from scratch, meaning that the first few months will be lean. Then you'll need to convince the bank that your business has fresh ideas that will eventually outsell the competition. All of these ideas need to be expressed as numbers -- losses, profits and sales forecasts that the bank can easily understand. 

As your business grows, sales forecasts continue to be an important measurement of your company's health. Wall Street measures the success of a company by how well it meets its quarterly sales forecasts. If a company predicts robust sales in the fourth quarter but only earns half that amount, it's a sign to stockholders that not only is the company performing poorly, but management is clueless. When attracting new investors to a private company, sales forecasts can be used to predict the potential return on investment [source: Virtual Adviser Interactive].

The overall effect of accurate sales forecasting is a business that runs more efficiently, saving money on excess inventory, increasing profit and serving its customers better [source: Virtual Adviser Interactive].

So what are some of the standard methods for creating a sales forecast? Does it require a lot of complicated math? Find out on the next page.