The first rule to remember when it comes to sales forecasting, is that once the forecast is set, it is immediately wrong. That being said, a sales forecast that is not grounded in reality can produce a boatload of headaches for an organization both in the short-term and long-term.
The eternal optimists love to focus on the following when considering a sales plan:
- New customers
- Higher sales to existing customers
- New product introductions
- Higher prices
- The prior year sales level
- Anecdotes unsupported by facts
Every one of these things needs to be balanced by their counterpart by asking the following:
- Is the assumption for customer attrition in line with prior experience? This of course assumes that 1) attrition is forecasted and 2) the company knows what customer attrition looks like.
- Which products might experience revenue declines due to either a) obsolescence, b) competing products in the market, and c) internal cannibalization?
- Will the new products be available on time?
- Is there any feedback from the market on new products?
- What is the price sensitivity of the product / customer?
- Are there any contractual agreements that have locked in prices?
- What pricing trends are occurring in the industry?
- If price increases are accepted, how will they be phased in, and will all of them stick?
- What recent events or announcements suggest a shift from the trend over the last year?
From a high level, other factors to consider include:
- Larger customers (if significant) should receive more focus.
- Large orders should be identified as either repeat or one-time.
- Look at the sum of the parts, not just the total. Overall sales for the last year could be up by 5%, but is each customer up 5% individually, or are some down 30%, while others are up 50%. This would likely impact how you look at things going forward.
- Major spreadsheet errors that under / overstate future sales (yes, these happen with either bad design or insufficient review).
Now that you have a forecast, which one is it? Is this the aggressive forecast for your sales force to achieve? Will your sales personnel stake their bonus on results of the forecast assumptions they provided? Do you use a more conservative forecast for your stakeholders (lenders and investors)?
Once the sales forecast is dialed in, producing a final P&L forecast requires an assessment of the resources (products, human capital, operating expenses, capital equipment and funding) to support that plan. Those will be covered in other posts.