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How to Do a Sales Forecast for Your Business the Right Way

Noah Parsons

15 min. read

Updated November 22, 2024

New (and established) entrepreneurs frequently ask me for advice about one thing—sales forecasting. 

These entrepreneurs tend to be optimistic about the future but are worried about creating unrealistic sales targets. When it comes to the details, most aren’t sure how to create accurate sales projections and struggle to predict how much money they will really make.

It’s an intimidating task, looking into the future. The good news is, none of us are fortune tellers and no one knows more about your business than you do. 

If you do happen to be able to see into the future, please just skip the whole startup thing and go play the stock market. It’ll be much easier and make you richer!

My advice? Just take a deep breath and relax. You’re as well equipped as everyone else to put together a credible, reasonably accurate forecast.

What you will learn

1. 1.Why "bottom-up" forecasting is better than "top-down" and what these forecasting methods are.
2. 2.Why you shouldn't create a forecast for everything that you're selling.
3. 3.How to check your assumptions before forecasting to improve your accuracy.

What is sales forecasting?

Sales forecasting is the process of estimating future sales so you can make smart business decisions.

A sales forecast is typically based on any combination of: 

• •Historical sales data
• •Industry benchmarks
• •Economic trends

Sales forecasting is a method designed to help you better manage your workforce, cash flow, spending, and any other resources that may affect revenue and sales.

It’s typically easier for established businesses to create more accurate sales forecasts based on previous sales data. Newer businesses, on the other hand, will have to rely on market research, competitive benchmarks, and other forms of interest to establish a baseline for sales numbers. 

For more details, check out our guide on creating a financial forecast without historical data.

Why is sales forecasting important?

Sets the stage for your full financial plan

Your sales forecast is the foundation of the financial story that you are creating for your business. 

Once you have a complete sales forecast, you can easily create your profit and loss statement, cash flow statement, and balance sheet.

Informs business goals

Beyond setting the stage for a complete financial forecast, your sales forecast helps you set realistic goals for your company. By predicting future sales, you can answer questions like:

• •What do you hope to achieve in the next month? Year? 5-years?
• •How many customers do you hope to have next month and next year?
• •How much will each customer hopefully spend with your company?

Answers investor questions

Having a solid sales forecast also provides a picture of your performance for potential investors. 

Like you, they want to see established goals and a firm trajectory for your business. The more detailed, organized, and up-to-date your sales forecast is, the better you can pitch and explain the position of your business to third parties and even employees.

Better manage expenses

Whether you start your financial forecast with sales or expenses you need to figure out the other half of the equation. Your sales forecast will guide how you approach budgeting and help you understand the minimum amount of sales needed to cover expenses. 

Assuming you want to run a profitable business, you’ll use your sales forecast to figure out how much you should spend on things like:

• •Marketing to acquire new customers
• •Operations and administration
• •Production costs
• •Personnel

Minimize risk when pursuing growth

Now, you don’t always need to be profitable, especially if you are trying to grow aggressively. In this situation, you may want to have an aspirational sales forecast—where you make strong sales projections and plan to figure out how much more to invest into your business. 

What you don’t want to do is immediately start spending like this optimistic growth is guaranteed. Instead, use your sales forecast to figure out how much:

• •More you want to sell
• •More you will need to spend
• •Cash you need to maintain

If you don’t have a sales forecast and blindly attempt to grow—you’ll struggle to hit targets, potentially overspend, and risk running out of cash altogether. 

Which sales forecasting model is best? 

Many startups make this mistake—and it’s a big one. 

They forecast “from the top down.” 

This means they figure out the total size of the market (TAM, or total addressable market) and then decide to capture a small percentage of that total market.

The problem? This kind of guessing is not based in reality. Sure, it looks credible on the surface, but you have to dig deeper. 

• •What’s driving those sales?
• •How are people finding out about this new smartphone company?
• •Of the people that find out about the new company, how many will buy?

So, instead of forecasting “from the top-down,” do a “bottom-up” forecast.

1. 1.Start with how many potential customers you could make contact with through advertising, sales calls, or other marketing methods. This is your SOM (your “share of the market”), the number of people you will realistically reach—particularly in the first few years of your business.
2. 2.Of the people you can reach, how many do you think you’ll be able to bring in the door or get onto your website?
3. 3.And finally, of the people that come in the door, get on the phone, or visit your site, how many will buy?

Here’s an example:

• •10,000 people see my company’s ad online
• •1,000 people click on the ad to my website
• •100 people end up making a purchase

These are all nice round numbers, but it should give you an idea of how bottom-up forecasting works.

The last step of the bottom-up forecasting method is to think about the average amount that each of those 100 people in our example will spend. 

On average, do they spend $20? $100? It’s O.K. to guess here.

The best way to refine your guess is to go out and talk to your potential customers and interview them. You’ll be surprised how accurate a number you get with a few simple interviews.

How to create a sales forecast

Your sales projections are estimates of the number of goods and services you believe you can sell over a period of time. This will also include the cost to produce and sell those goods and services (COGS) and the estimated profit you’ll walk away with.

Here are the general steps you’ll need to take to create a sales forecast:

1. 1.List out the goods and services you sell
2. 2.Estimate how much of each you expect to sell
3. 3.Define the unit price or dollar value of each good or service sold
4. 4.Multiply the number sold by the price
5. 5.Determine how much it will cost to produce and sell each good or service
6. 6.Multiply this cost by the estimated sales volume
7. 7.Subtract the total cost from the total sales

This is a super basic rundown of what is included in your sales forecast to give you an idea of what to expect. 

Remember, don’t do all of your sales categories at once.  Repeat these same seven steps for each one individually.

Now, we’ll dive into specific methods, assumptions, and questions you’ll need to ask to build a viable sales forecast.

How detailed should your forecast be?

When forecasting your sales, the first thing to do is figure out what revenue streams (ie. products or services) you will create projections for. 

You don’t want to be too generic and just forecast sales for your entire company. On the other hand, you don’t want to forecast sales for every individual product or service that you sell.

For example, if you’re starting a coffee shop, you shouldn’t forecast each item on the menu individually. Instead, create broader categories like hot drinks, cold drinks, and baked goods.

Ultimately, you want between 3-10 sales forecast categories. 

More than ten will be a lot of work to forecast and fewer than three probably means you haven’t divided things up quite enough.

You really can’t get this wrong. If it’s not working as expected, you can always adjust the categories later. Just pick a few to get started and move on.

Should you forecast in units or dollars?

Let’s start by talking about “unit” sales.

A “unit” is simply a stand-in for whatever you are selling. A single lunch at a restaurant would be a unit. An hour of consulting work is also a unit. 

With that out of the way, let’s talk about why you should forecast sales by units.

Why you should forecast sales on units

When you forecast by units, you have a couple of different variables to play with: the number of units sold and the price point.

With a dollar-based forecast, you only think about the total amount of money you’ll make in a given month. You skip the details of the number of units being sold and the average price you are selling each unit for.

Units help you think about the number of products, hours, meals, etc. It’s easier to think about sales this way rather than just in dollars (or yen, or pounds, or rand, etc.).

Another benefit is at the end of the month, you can look back at your sales performance and compare it to your forecast in greater detail. 

• •Did I meet my goals because I sold more units?
• •Or did I sell for a higher price than I thought I would?

To forecast sales by units, you:

1. 1.Predict how many units you will sell each month—using the bottom-up method of course.
2. 2.Figure out what the average price is going to be for each unit.
3. 3.Multiply those two numbers together and you have the total sales you plan to make each month.

For example, if you plan on selling 1,000 units at $20 each, you’ll make $20,000.

What are your sales forecast assumptions?

If you base your sales projections on historical data, market research, or even hyper-sophisticated modeling—it will still be built on assumptions.

A good forecast is not meant to predict the future. You’re just aggregating information and making educated guesses to help define your future outlook. These assumptions are always changing, meaning that you’ll need to have a pulse on the following:  

Market conditions

Having a general understanding of the macro effects on your business can help you better predict overall growth. 

A growing or shrinking market can either provide a low or high ceiling for potential sales increases. So, you need to understand how your business can react to any changes.

• •What does the broader market look like?
• •Is the economy slowing or growing?
• •Is the industry you operate in seeing an influx of competition?
• •Maybe there’s a labor or material shortage?
• •Are there new customers you now have access to?

Products and services

You may find yourself making regular changes to your products and services. This can be sales factors that impact the customer, or production factors that impact the overall cost. 

• •Are you making any changes or updates to current offerings?
• •Are you launching a new product or service that compliments or disrupts your existing sales?
• •Are you adjusting prices or sales channels?
• •Are you able to decrease the cost of production?
• •Or are expenses rising due to material, labor, or other production costs?

Seasonality

Depending on what you’re selling, you may find dips or increases in sales at specific times during the year. This seasonality may have to do with the weather, holidays, product/feature releases, or a number of other predictable factors. 

If you have been operating for a while, look at your accounting data to identify trends. If you’re a new business look to your competitors to see how they act during specific times of the year to identify these trends earlier on.

Marketing efforts

How much you spend on marketing, and even your messaging may have an impact on your overall sales. Make sure that you connect any performance changes to marketing efforts that may affect your performance.

• •Are you launching a new marketing campaign?
• •Are you spending more or less on advertising?
• •Are you adjusting your targeting for digital ads?
• •Are you branching out or removing specific marketing channels from your overall strategy?

Regulatory changes

You may find that specific laws or regulations directly impact your industry. It’s difficult to anticipate what legislation will provide a negative or positive impact, and just how often this type of regulatory change may occur. 

The best thing you can do is keep your ear to the ground and be ready to adjust expenses or sales when any changes appear to make traction.

Experience and expectations

If you have experience in the field or industry you’re starting a business in, you likely have some natural insight into sales performance. While this can be valuable to inform your initial guesses, it can also skew your sales forecast to be too positive or negative.

Similarly, if your business has been operational for a few years, you have historical sales data to use. This can inform your forecast but it shouldn’t be the sole source for your projections. Use the numbers as a starting point, consider what impacted performance previously, and use the other assumptions I listed to adjust from there.

Remember, previous data and experience can be both a benefit and a hangup when forecasting. Reference the information but don’t take it at face value. 

How far forward should you forecast?

I recommend forecasting monthly for 12 months into the future and then developing an annual sales forecast for another three to five years.

The further your forecast into the future, the less you’re going to know and the less benefit it provides. After all, the world will change, your business is going to change, and you’ll be updating your forecast to reflect those changes.

12 months from now is far enough into the future to make a good educated guess. You’ll have to update your forecasts regularly with actual performance to help keep them accurate. 

And don’t forget, all forecasts are wrong—and that’s O.K. Your forecast is just your best guess at what’s going to happen. As you learn more about your business and your customers, change and adjust your forecast. It’s not set in stone.

Why using visuals will make forecasting easier

My final piece of advice is to make sure you visualize monthly sales with a chart or graph.

A visualization of your sales projections will make it easier to see how your sales might dip during a slow period of the year and then grow again during your peak season. 

A chart will also highlight potentially unreasonable guesses about your sales growth. If for example, you show a big jump in sales from one month to the next, you should be able to back this up with a strategy to deliver those sales.

Adjust your forecasts based on actual results

Smart businesses use their sales forecast to measure their progress and ensure they’re on the right track. 

Their sales forecast becomes a live forecast—an up-to-date management tool that helps them run their business better.

The easiest way to convert your sales forecast into a management tool is to have a monthly financial review meeting where you look at your business’s finances. You shouldn’t just look at your accounting system, though. You should compare the numbers from your accounting software to your forecast and see if you’re on track. 

Are you exceeding your goals? Are you falling short? 

Either way, knowing if you’re meeting your goals or not will help you determine if you need to make some shifts in strategy. This way, your business numbers drive your strategy.

Sales forecasting isn’t as difficult as you think

Just remember that sales forecasting doesn’t have to be hard. Anyone can do it and you, as an entrepreneur, are the most qualified to do it for your business. You know your customers, market, and goals—so you can forecast your sales. 

Ready to create your own sales forecast? Download our free sales forecast template for additional guidance, pre-built formulas, and formatting for both product and subscription businesses.

For additional guidance and features, consider using sales forecasting software like LivePlan. With LivePlan, you can:

• •Automatically turn accounting data into forecast categories.
• •Generate revenue suggestions and instantly add them to your sales forecast.
• •Compare your forecast to actual accounting data with the smart performance dashboard.
• •Maintain an accurate view of your cash position and profitability with Live Forecast.
• •Get an AI-powered analysis of your business performance every single month.

All of these features allow you to spend less time building and updating your sales forecasts and more time analyzing performance to make better decisions.

FAQ

How do you calculate your sales forecast?

Calculating your sales forecast for an individual product or service is fairly simple. Set a number for how many sales you expect to make, and multiply it by how much it will be sold for.

What data is needed for a sales forecast?

The data needed for a sales forecast depends on your business stage. If you’re a new business you just need a list of your revenue streams. You can also collect industry data and market reports to help guide your projections. If you’re an up-and-running business, it’s best to use your historical data as a starting point to create your sales forecast.  

What is the best method to forecast sales?

The best method to forecast sales is bottom-up forecasting. It forces you to estimate how many people you’ll realistically be able to reach and convert instead of working from the overall market size.

Noah Parsons

Before joining Palo Alto Software, Noah Parsons was an early Internet marketing and product expert in the Silicon Valley. He joined Yahoo! in 1996 as one of its first 101 employees and become Producer of the Yahoo! Employment property as part of the Yahoo! Classifieds team before leaving to serve as Director of Production at Epinions.com. He is a graduate of Princeton University. Noah devotes most of his free time to his three young sons. In the winter you'll find him giving them lessons on the ski slopes, and in summer they're usually involved in a variety of outdoor pursuits. Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.