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3 Popular Sales Forecast Examples For Small Businesses

• October 9, 2022
• Small Businesses

When creating financial forecasts for their business, entrepreneurs often face difficulties. Yet, there are 3 popular sales forecast examples you can use when creating yours. They work for the most popular revenue models , from restaurants, to retail shops, to software companies and other online businesses.

If you aren’t sure what are sales forecasts, read our article and follow these 5 simple steps to create accurate sales forecasts for your business. Looking for examples instead? In this article we explain what are the most popular 3 sales forecast examples for (almost) any type of business. Let’s dive in.

What is a sales forecast?

A sales forecast is the financial projection of a business’ sales (or revenues, turnover) over a given period. Therefore, sales forecasts are a must have of any financial forecast: by projecting sales and expenses we can then prepare the  4 financial statements  which constitute a financial forecast.

Often, sales forecasts are included within a business plan as part of your projected financial statements. Indeed, investors will want to see your business’ financial projections over a given period. Sales forecasts often are  3 or 5-years projections .

For more information on sales forecasts for small businesses and why they are important, read our article here .

Let’s now dive into the 3 most popular sales forecast examples which work for any type of business, from restaurants, to retail shops, to software companies and other online businesses.

Why are sales forecasts important?

Because sales forecasts are part of your financial forecasts, and ultimately your business plan, it is very important to get it right.

Sales forecasts help you set goals for your business

Sales forecasts aren’t simply a requirement for your business plan. Instead, they also help you set goals for your business. The sales you expect to generate as per your sales forecast should be used as a guidance for your budget and your business decisions later on.

You show you understand your business

Showing investors you’re not only a great entrepreneur but also a well-rounded and omniscient founder is very important to get the best deal. A great sales forecast will help understand how your business generates revenues, what are the different drivers affecting revenue and the potential risks involved.

Investors will give more credit to financial plans based on verified assumptions and reasonable targets. Calculate expected revenue using market size , market share and/or user adoption rates for instance. The more you justify your plan with verified assumptions, the more credible it will be.

You know how much you need to raise

Many entrepreneurs and founders do not really know exactly how much they need to raise.

Sales also drive expenses, so forecasting sales plays a pretty important role when assessing things such as your breakeven or the amount of money you need to raise . Miss the mark and you may be in trouble.

How much cash do you need to cover your losses over the next 12-18 months? The amount of money you need to raise is the result of your financial projections. This is very important to accurately estimate your revenues and expenses.

How to do a sales forecast?

Before we dive into the specifics of creating a rock-solid sales forecast for your small business, let’s first explain which approach you should follow.

Many entrepreneurs make the same mistake when forecasting their sales: they use a top-down approach. So what is bottom-up and top-down sales forecasting? Let’s use an example below.

• Top-down sales forecasting : we forecast sales using from the top down. For example, you make $500k in revenue per year and you forecast the next 3 years revenue by assuming you will capture 3% of your market size (assuming it is $100 million). By following this approach, your annual revenue is 3 years time is $3 million, a 6x increase from today.
• Bottom-up sales forecasting : we forecast sales using operational drivers (from the bottom up). For example, if your $500k sales are a function of your website traffic, we will forecast revenues based on this metric instead. Assuming website traffic increase by 50% each year (as you invest in paid and content), your revenue in 3 years time is $1.7 million, a 3x increase from today.

Bottom-up sales forecasting is the best approach for 2 main reasons:

• It allows us to relate revenues to another metric, helping us making sense of the projection. Does $3 million really make sense given this would mean multiplying website traffic by 6x over the next 3 years?
• Top-down approach requires us to make assumptions on the market size, which is often inaccurate for lack of publicly available data. Instead, bottom-up uses your own business’ historical data

Sales forecasts: 3 popular examples

1. location-based businesses.

If you are running a businesses with a physical location, such as a hotel, a restaurant, a repair shop or a retail store for example, forecasting sales boils down to forecasting street traffic.

Indeed, sales (revenues) are a function of the sales volume you generate (the number of “units” or products you sell). The sales volume itself is a function of the number of people who enter your store, and, by extrapolation, the number of people who pass by your store.

When forecasting sales for a new business, you should look at the location where your business will be based first. Assess the approximate number of people who are passing by.

Note: when assessing traffic, be careful to exclude any external factors (e.g. Christmas day), cyclicality and seasonality. Ideally, your assessment should look at a full week and all work hours in the day.

Once we have established the approximate number of people who pass by the street in a day, we will need to apply conversion rates, in order:

• How many people enter the store?
• Out of the people who enter the store, how many make a purchase?

Of course, if you already have some historical data (if you already run a store and are opening a new one), use your existing conversion rates. Else, make assumptions.

When making assumptions, you should use the data you have collected when making your own observations earlier. Use similar stores to yours, in a different street for example.

For example:

• 5% of people passing by your store enter
• 10% of people entering the store make a purchase

We can now create a simple sales forecast over a week, adding up the average traffic over a typical week:

2. Online businesses

Online businesses often acquire their customers via their website, or any type of online presence.

As such, unlike location-based businesses, sales (revenues) are a function of visitors (and not street traffic). The visitors can be visitors on a website, on a Appstore page (mobile apps) or any type of online lead acquisition page.

We often refer this type of acquisition as inbound acquisition . The traffic is two fold: paid and organic:

• Paid traffic : all visitors coming from paid marketing channels (Google Search, Facebook Ads, etc.). You are either paying for clicks, or impressions. 
• Organic traffic : all visitors landing on your landing page(s) organically (either via a referral link, direct search, social media post, blog article, etc.)

Paid marketing is the easiest way to generate traffic. Yet, because you are paying for each paid visitor, you will need to monitor your  Return on Ad Spend (ROAS)  to make sure your paid marketing campaigns are profitable.

In comparison, whilst you do not directly pay for each organic visitor, organic traffic is not free. Organic traffic is earned from investment into  SEO  and content. Whilst investing into your SEO for instance does not pay immediately, the returns can far outweigh those of your paid marketing in the long run.

So, when forecasting sales for online businesses, we should make assumptions on traffic. For example assuming:

• 30,000 visitors last month: 20,000 paid and 10,000 organic
• 3% monthly increase
• 2% conversion rate
• $50 average purchase price

This is how could look like a simplified sales forecast example for an online business:

3. Lead-acquisition businesses

Lead-acquisition businesses are companies that make sales through their sales teams efforts. This is also known as outbound acquisition (vs. inbound discussed above).

With outbound acquisition, a business acquires customers through its sales team. Whether it is via phone, email, Linkedin or even in-person, the number of acquired customers is a function of the number of sales people.

Outbound acquisition is very common for business-to-business (B2B) companies. For example, Enterprise SaaS and B2B marketplaces use outbound acquisition to acquire their customers.

Outbound customer acquisition is therefore easier to forecast vs. inbound. The simple formula to estimate new customers over time is:

The number of closings per sales person is also referred to as the efficiency of your sales team = the number of customer one sales person acquire (or “close”) each month, in average.

For example, lets’ assume you have 20 sales people. Historically, your sales team has closed (“acquired”) in average 2 B2B clients per month per sales person. Assuming you have the same number of sales persons and the same sales efficiency in the future, we can reasonably expect 40 new customers per month.

Now, assuming 1 new hire every 2 months, a sales forecast example for a lead-acquisition business could look like this:

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How to Create a Sales Forecast (Examples & Templates)

Every business needs management tools to maximize performance and keep everything running smoothly. A sales forecast is a critical tool that businesses use to measure their progress and check everything is going to plan. Here’s a closer look at why sales forecasts are important and how to create them. We have some great templates for you, too.

What Is a Sales Forecast – And Which Factors Impact It?

Sales forecasts are data-backed predictions about the sales volume a business will experience over a specific period.

A sales forecast is very important because it provides the foundation for almost all other planning activities. Businesses will rely on accurate sales forecasting to better understand how they should plan financially and execute their game plan .

This means that sales forecasts have the potential to make or break a business.

As with anything in life, though, nothing is certain. Sales forecasts can be affected by a range of factors. This means that businesses have to prepare for any and all eventualities.

Here’s a look at some of the factors that can affect sales forecasting:

A lack of sales history

Sales forecasts are often built using historical data. Businesses analyze previous results to extrapolate and create predictions. If a business starts and lacks a good body of historical sales data, it will struggle to create an accurate sales forecast.

The type of business

Each industry has its series of unique challenges and quirks. Those factors are sometimes unpredictable and could affect a business’s revenues. The ad tech industry, for instance, is often rocked by new data privacy regulations.

Outside factors

Some businesses find that everything is moving according to plan before blindsiding by an unpredictable event they cannot control. Consumer earnings may plummet, for instance, and cause people to restrict their spending.

Inside factors

Some businesses are forced to change their pricing or payment structures. This new dynamic can often have unpredictable effects and cause a business to veer off course from what its sales forecast predicted.

Why Should You Establish Sales Forecasts?

Sales forecasting is essential for every business. Here are some of the key reasons.

Perform accurate financial planning

Sales forecasts help the CFO and financial team understand how much cash is going to be coming into a business. This gives businesses a better understanding of how they can use that capital and makes it possible to calculate what profit they can expect over a given period .

Plan sales activities

A sales forecast can help executives with sales planning. Those executives will understand how many salespeople to employ, for instance, and which quotas and targets to attribute to each of those salespeople. This means that an accurate sales forecast can help salespeople to understand and hit their objectives.

Coordinate marketing

A sales forecast will have a big impact on marketing. For instance, the sales forecast might show that sales are waning, and a bigger investment needs to be placed within marketing. It might also show that a particular product or service fails to deliver appropriate amounts of value.

Control inventory

A sales forecast gives businesses a good understanding of how much inventory they will need to purchase and retain. This is an important factor; it helps businesses balance overstocking and running out of materials. This is also true for SaaS businesses needing customer support and success.

Avoid fluctuations in price

An accurate sales forecast helps businesses maintain consistent product and service pricing. A poor sales forecast might mean a business is forced to adjust its pricing unpredictably. This tactic is often the result of panic; without the proper strategy, it jeopardizes a business’s profitability.

How to Forecast Sales – The Best Sales Forecasting Methods

Businesses around the world use a range of sales forecasting techniques. Here’s a closer look at some key methods you could use.

Opportunity Stage Forecasting

What is it?

This sales forecasting technique calculates the likelihood of deals closing throughout a pipeline.

Most businesses use a sales pipeline divided into a series of sections. The likelihood of converting a prospect increases the deeper the prospect moves into the sales process. To get the most from this technique, the team must dig into the current performance of the sales team.

After that analysis, the probabilities might look something like this:

• Sales Accepted lead : 10% probability of closing
• Sales Qualified Lead : 25% probability of closing
• Proposal sent : 40% probability of closing
• Negotiating : 60% probability of closing
• Contract sent : 90% probability of closing

Using these probabilities, you can extrapolate an opportunity stage sales forecast. You’ll want to take the deal’s potential value and multiply that by the win likelihood.

Who should use it

This is a great sales forecasting method if you have access to historical data, lots of leads in your pipeline, and you need a quick estimate. It’s important to understand that this isn’t the most accurate option, given that many random factors affect those probabilities.

Length of Sales Cycle Forecasting

This sales forecasting method finds the average length of your sales cycle. This helps you predict when your deals will likely close and reveal opportunities for your sales team to expedite the sales cycle.

This method is simple. You can find the length of your average sales cycle using the following basic formula:

Total # of days to close deals / # of closed deals

Let’s imagine, for instance, that you find the following:

• Deal 1: 28 days
• Deal 2: 15 days
• Deal 3: 50 days
• Deal 4: 38 days

We closed four deals, and it took 131 days to close them all together. This means that the average length of our sales cycle is 33 days.

Equipped with that information, we can look at our pipeline and estimate how likely we are to close deals based on how old they are. The closer a deal moves toward the average sales cycle length, the more likely it will be closed.

This is a great sales forecasting method for sales managers who want to learn more about the deals spread across their pipeline. For instance, they can use this method to differentiate between different types of groups.

Sales managers might find that the average sales cycle length is much shorter for web leads, for example, when compared to email leads.

Historical Forecasting

Historical forecasting is a very quick and simple sales forecasting technique. The process involves looking back at your previous performance within a certain timeframe and assuming that your future performance will be superior or at least equal.

This is a useful reference because it helps you to get to grips with seasonality and the outside factors that affect your sales. You might find, for instance, that the holidays are a particularly slow time for your business, and looking at historical data can help you to prepare.

With that said, historical forecasting has its issues. It assumes that buyer demand will be constant, which is no longer a given. This could mean you overestimate your sales statistics and use an accurate sales forecast.

This forecasting method is ideal for a business that needs a quick and easy way to project how much it will sell over a given period. That said, historical data should be used as a benchmark instead of the foundation of a sales forecast.

Lead Pipeline Forecasting

This time-consuming sales forecasting method involves reviewing each lead within your pipeline and determining how likely the deal will be closed. That likelihood is determined by exploring factors like the value of the opportunity, the performance of your salespeople, seasonality, and more.

This is a time-consuming method, and it often makes sense for businesses with fewer high-value leads – it wouldn’t necessarily be efficient or make much sense for a SaaS business, for instance.

The big benefit of this method is its accuracy. If you have reliable and rigid data to base your analysis on, you will find that this method can give you a deeper insight into each lead.

This method makes sense for those businesses that have a lower number of leads. Inside salespeople, for instance, will want to get a clearer picture of every lead within their pipeline. This method isn’t appropriate for SaaS businesses that operate according to volume.

Test Market Analysis Forecasting

Businesses often launch exciting new products and services. But it can be difficult to get accurate sales forecasts without historical data . Test Market Analysis forecasting is the process of developing a product or service and introducing it to a test market to forecast sales and get an approximation of future sales.

This limited rollout allows businesses to track the performance of the new offering and monitor things like consumer awareness, repeat purchase patterns, and more. This is a data-gathering exercise, and it feeds businesses with the information they need to create accurate sales forecasts.

This approach is perfect for those businesses that need to perform real-world experiments to gather useful information. A new business can use sales forecasting to use its sales data to predict where future sales can come from. This can limit the cost since it’s an effective way of having a busy sales pipeline. The limited rollout of the product is also useful from a product perspective, given that adjustments can be made according to feedback.

A big issue with this form of forecasting is that one test market may not be like the others. Your data might not reflect the wider reality, so you must make prudent choices that provide you with accurate information.

Multivariable Analysis

As the name suggests, this method calls upon analyzing a range of variables to get the clearest picture possible. This means that if the method is performed well, it can often provide the most accurate forecast.

If you use this technique, you will want to bring together factors like the average length of your sales cycle, the performance of your salespeople, historical forecasting, and more.

The success of this method hinges upon two key factors within your business: 

• the accuracy of your salespeople and their reporting
• the quality of the forecasting tools that you use.

Both of these factors must be in place to make sure this forecasting method has the best chance of success.

Multivariable forecasting is most appropriate for larger and well-organized businesses, as it uses the data and tools necessary to blend various forecasting methods into one. This could be it if you need the most accurate forecast method possible.

Intuitive Forecasting

Your salespeople are on the front; their experience is very valuable. They often have a good idea of how likely they are to close a particular deal and can use educated guesses to assess the situation.

Experienced salespeople can take emotion out of the equation and rely on their experience and knowledge to make accurate predictions. Some businesses decide to incorporate those gut instincts into the way that they forecast a particular sale.

Some businesses, for instance, will add a score to the conversion probability of their various prospects according to the gut feeling of their salespeople.

This intuitive forecasting method is particularly useful for businesses that lack historical data. Without the quantifiable data to provide the basis for your sales forecasting, you might have to turn to more qualitative assessments from your salespeople.

The downside of this sales forecasting method is clear, though. These assessments are highly subjective, and you might find that your salespeople are often more optimistic in their projections. This means those projections should be taken with a pinch of salt, but they are better than nothing.

Sales Forecast Examples

We know the theory, but how about the practice? In these awesome examples, let’s take a closer look at what those sales forecast methods look like.

Standard Business Plan Financials

This example from Tim Berry (chairman and founder of Palo Alto Software) looks at what a startup sales forecast might look like .

Tim sets the scene and describes Magda’s situation – she wants to open a small café in an office park.

He goes on to show how Magda would establish a base case, estimate her monthly capacity, and what type of sales she could expect. To wrap up, she goes through her month-by-month estimates for her first year and estimates her direct cost.

This is a great exercise and unmissable reading for new entrepreneurs dreaming up a new venture.

Sales Forecast Guide by Toptal Research

This simple sales forecasting guide from Toptal Research also includes a simple example that forms the basis of the guide. These simple visuals and data will give you a good idea of how you can put your sales forecasting efforts together and what it will look like.

This example also shows that you can attractively forecast sales and inform the sales teams. Sales forecasting doesn’t have to be boring columns of data, but you can bring your sales forecast to life with colorful visuals.

Detailed Sales Forecast by Microsoft

This detailed sales forecast template from Microsoft makes it simple for you to estimate your monthly sales projections.

The formula comes with pre-built formulas and worksheet features that result in an attractive and clear template. The template also relies on a weighted sales forecasting method based on the probability of closing each opportunity.

Even if you do not use this exact template, it’s a great file to use. It can give you a great idea of the information you need to include and how it might come together in a spreadsheet format.

Sales Forecast Templates

Looking for your own sales forecast templates to get a running start? Here’s a look at some of the most practical and useful templates.

Sales Forecast Template for Excel by Vertex42

This free sales forecast template helps you keep a handle on key information like unit sales, growth rate, profit margins, and gross profit.

The template is already set up to help you compare and analyze a range of products and services on a monthly basis. The chart also includes a range of sample charts that can be used to effectively and accurately communicate the contents of your sales forecast.

The same worksheet can be used to create monthly and yearly forecasts. You can play with the template to find your desired view and information. 

Sales Forecast Template by Freshworks

This simple forecasting template helps you to put together an effective sales forecast. This finished product can then be used to grow your revenues and hit your quotas.

This template is particularly effective for small businesses and startups that need to project sales and prioritize deals at the early stages of their business. Freshworks also explains that the template can help businesses achieve a higher rate of on-time delivery and accurate hiring projections.

The free sales forecast template is very intuitive to use. Again, it’s great to flick through the spreadsheet to understand what you need in a sales forecast and how it can be put together.

Free Sales Forecast Template by Fit Small Business

This sales forecast template is perfect if your CRM doesn’t currently offer built-in sales forecasting. This template can help you create a forecast from scratch that is adjusted to your own particular needs much quicker.

The template is available in various formats, including PDF, Excel, and Google Sheets. This is great news if you create your small business on your own terms and have limited software access .

Again, this template is clear and simple to use. All of the fields are explained within the spreadsheet – you don’t have to worry about going elsewhere to find definitions.

Sales Forecasting Tools

Looking for sales forecasting tools to take your activities to the next level? Here’s a look at some of the standout options.

Pipedrive is a sales CRM that is designed for salespeople by salespeople. It is a robust CRM that includes all of the features a sales team needs to achieve sales success and grow their business.

The tool also includes a forecasting tool. This tool acts as a personal sales manager that helps salespeople to choose the right deals and activities at the right time. This helps salespeople to become better closers.

By all accounts, this function is very useful for salespeople and managers alike. The forecasting tool can also be customized to match the specific needs of salespeople.

Smart Demand Planner

Smart Demand Planner is a consensus demand planning and statistical forecasting solution that understands how accurate critical forecasts are to a business.

The tool was built on the premise that forecasts are often inaccurate and can cause various issues. Moreover, the traditional sales forecast often resides within a complex spreadsheet that is difficult to use, share, and scale.

The tool aims to fix those issues by aligning strategic business forecasting at all levels of your hierarchy. Smart Demand Planner offers a statistically sound objective foundation for your sales activities.

amoCRM is an easy and smart sales solution that focuses on the world of messenger-based sales. The platform understands the popularity and potential of messenger apps, so it offers a whole new way of using the channel to create valuable relationships.

The tool also includes visual, real-time reports that give salespeople and managers powerful insights. These analytics can be used to set targets and also forecast future sales. What’s more, they can measure performance and identify target areas.

The visual look and feel of the platform make this a very intuitive option. It can drive value through accurate forecasting in businesses where messenger-based selling is critical.

As we have seen, forecasts are critical to the success of your business. They can be cost-effective for a new business, keep sales teams and reps informed, and more. However, every business also needs the leads to make those forecasts a reality. Learn more about UpLead today and how our platform can help you to find, connect, and engage with qualified prospects.

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

Posted june 8, 2021 by noah parsons.

New entrepreneurs frequently ask me for advice about forecasting their sales . These entrepreneurs are always optimistic about the future of their new company. However, when it comes to the details, most aren’t sure how to predict future sales and how much money they’re going to make.

It’s an intimidating task, looking into the future. The good thing is, none of us are fortune tellers and none of us know any more about your new 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!)

So, my advice is always to just take a deep breath and relax. You’re as well equipped as everyone else to put together a credible, reasonably accurate forecast. Let’s dive right in and figure it out.

What is sales forecasting?

Sales forecasting is the process of estimating future sales with the goal of better informing your decisions. A sales forecast is typically based on any combination of past sales data, industry benchmarks, or economic trends. It’s a method designed to help you better manage your workforce, ash flow, 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. 

Check out our detailed guide on creating a full financial forecast without historical data for more.

Why is sales forecasting important?

Your sales forecast is the foundation of the financial story that you are creating for your business. Once you have your sales forecast complete, you’ll be able to easily create your profit and loss statement , cash flow statement , and balance sheet.

Sales forecasts help you set goals

But beyond just setting the stage for a complete financial forecast, your sales forecast is really all about setting goals for your company . You’re looking to 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?

Your sales forecast will help you answer all of these questions and potentially any others that involve the future of your business.

Sales forecasts inform investors

Having a solid sales forecast also provides a picture of your performance and performance milestones for potential investors. Like you, they want to be sure you have established goals and a firm trajectory for your business laid out. The more detailed, organized, and up-to-date your forecast is, the better you explain the position of your business to third parties and even employees.

How to use your sales forecast for budgeting

Your sales forecast is also your guide to how much you should be spending. Assuming you want to run a profitable business, you’ll use your sales forecast to guide what you should be spending on marketing to acquire new customers and how much you should be spending on operations and administration. 

Now, you don’t always need to be profitable, especially if you are trying to expand aggressively. But, you’ll eventually need your expenses to be less than your sales in order to turn a profit.

How detailed should your forecast be?

When you’re forecasting your sales , the first thing you should do is figure out what you should create a forecast for. You don’t want want to be too generic and just forecast sales for your entire company. On the other hand, you don’t want to create a forecast for every individual product or service that you sell.

For example, if you’re starting a restaurant, you don’t want to create forecasts for each item on the menu. Instead, you should focus on broader categories like lunch, dinner, and drinks. If you’re starting a clothing shop, forecast the key categories of clothing that you sell, like outerwear, casual wear, and so on.

You’ll probably want between three to ten categories covering the types of sales that you do. More than ten is going to be a lot of work to forecast and fewer than three probably means that you haven’t divided things up quite enough.

You really can’t get this wrong. After all, it’s just forecasting and you can always come back and adjust your categories later. Just pick a few to get started and move on.

Which forecasting model is best? Top-down or bottom-up?

Before they have much historical sales data, lots of startups make this mistake—and it’s a big one. They forecast “from the top down.” What that means is that they figure out the total size of the market (TAM, or total addressable market) and then decide that they will capture a small percentage of that total market.

For example, in 2015, more than 1.4 billion smartphones were sold worldwide. It’s pretty tempting for a startup to say that they’re going to get 1 percent of that total market. After all, 1 percent is such a tiny little number, it’s got to be believable, right?

The problem is that this kind of guessing is not based on any kind of reality. Sure, it looks like it might be 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 are going to buy?

So, instead of forecasting “from the top-down,” do a “bottom-up” forecast. Just like the name suggests, bottom-up forecasting is more of an educated guess, starting at the bottom and working up to a forecast.

Start by thinking about how many potential customers you might be able to make contact with; this could be through advertising, sales calls, or other marketing methods. This is your SOM (your “share of the market”), the subset of your 1 percent of the market that you will realistically reach—particularly in the first few years of your business. This is your target market .

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? 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 from the ad to my website
• 100 people end up making a purchase

Obviously, 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 ends up spending. On average, do they spend $20? $100? It’s O.K. to guess here, and 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 can get with a few simple interviews.

How to create a sales forecast

Keep in mind that your sales forecast is an estimate 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, as well as the estimated profit you’ll come away with.

We’ll dive into specific methods, assumptions, and questions you’ll need to ask in order to build a viable sales forecast. But to start, here are the general steps you’ll need to take to create a sales forecast:

• List out the goods and services you sell
• Estimate how much of each you expect to sell
• Define the unit price or dollar value of each good or service sold
• Multiply the number sold by the price
• Determine how much it will cost to produce and sell each good or service
• Multiply this cost by the estimated sales volume
• 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. For example, you may find the need to aggregate similar items into unified categories, if you sell a large variety of items. And if at all possible, try to keep your forecasted items grouped similarly to how they appear on your accounting statements to make updates easier.

Check out this video for a quick overview of how to forecast sales:

Now let’s dive into some specific elements of your forecast you’ll need to define ahead of time.

Should you forecast in units or dollars?

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

A “unit” is simply a stand-in for whatever it is that you are selling. A single lunch at a restaurant would be a unit. An hour of consulting work is also a unit. The word “unit” is just a generic way to talk about whatever it is that you are selling.

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

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

With a dollar-based forecast, you are only thinking about the total amount of money that you’ll make in a given month, rather than the details of the number of units that you are selling and the average price you are selling each unit for.

To forecast by units, you predict how many units you’re going to sell each month—using the bottom-up method of course. Then, you figure out what the average price is going to be for each unit. Multiply those two numbers together and you have the total sales you plan on making each month.

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

When you forecast by units, you have a couple of different variables to play with: What if I’m able to sell more units? What if I raise or lower my prices?

Also, there’s another benefit: At the end of a month of sales, I can look back at my forecast and see how I did compared to the 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? This level of detail helps you guide your business and grow it moving forward.

Sales forecast assumptions

One thing to remember is that your sales forecast is built on assumptions. You’re not predicting the future, but aggregating information 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, you can likely look at your accounting data to identify any trends. If you’re a new business look to your competitors to see how they act during specific times of the year to help you 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.

How far forward should you forecast?

I recommend that you forecast monthly for 12 months into the future and then just develop 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’s going to have for you. After all, the world is going to 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 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, you can change and adjust your forecast. It’s not set in stone.

Why using visuals will make forecasting easier

My final word of advice is to make sure that you graph your monthly sales with a chart.

A chart will make it easy 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 at 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 that’s going to deliver those sales.

Adjust your forecasts based on actual results

Your sales forecast isn’t done when you start sharing it with lenders and investors. Instead, smart businesses use their sales forecast to measure their progress and ensure that 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? Or maybe you’re falling a little bit 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.

Forecasting is easier with LivePlan

Sales forecasting tools like LivePlan can help with this. LivePlan uses a smart dashboard to automatically compare your forecast to your numbers from your accounting system—no cutting and pasting or complicated spreadsheets required. And with LivePlan’s LiveForecast feature , you can update the forecasts within your Profit and Loss Statement, with the push of a button. 

This allows you to spend less time updating and more time analyzing performance to make better decisions. In fact, the LiveForecast feature allows you to expand the details of your performance and identify the variance in performance within your statements. You’ll know your current cash position and the impact on projected year-end totals at a glance. It provides you with enough information to then explore the dashboard with questions and potential steps in mind.

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, and you know your market, so you can forecast your sales.

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How to calculate a sales forecast for a new business

Table of Contents

Definition of a sales forecast

The uses of a sales forecast, how to calculate sales forecast for a new business, calculate a sales forecast using the accounts of your competition , calculate a sales forecast using a target market, manage your finances with countingup.

When you’re running a business, you should always keep one eye on the future. If you don’t have a rough idea of what the next week, month, or year might bring, you’ll be at a disadvantage when making business decisions. This means that calculating a sales forecast is essential, especially when you’re just starting a business or beginning to write a business plan . 

Sales forecasting can be tough if you don’t have much business experience, but we’re here to help. This article will cover a range of different topics related to sales forecasting, including:

Creating a sales forecast is the first step in managing your company’s cash flow . Your cash flow is the movement of money in and out of your business. By forecasting your sales, you’ll be able to predict your gro s s profit and net profit , which means you can start anticipating what money you’ll have to spend on running your business for the next month. 

Put simply, a sales forecast is a prediction of how much you’re going to sell in the coming month. This forecast doesn’t need to be a guess — it’s possible to calculate a fairly accurate forecast with some thorough research. The focus of your research will differ depending on which sales forecast method you pick.

Firstly, your sales forecast is important because it helps you set sales goals . Measuring the success of your business is a vital part of deciding its future, and setting sales goals is one of the simplest ways to measure success. 

If you have an accurate sales forecast, you’ll be able to set realistic sales goals. You’ll want your goals to be realistic, as this will give the clearest picture of how well your company is doing and if significant changes are needed.

Similarly, sales forecasts can also help create an accurate budget for your business. As a sales forecast is essential for predicting the money your business will make, it also plays an important part in working out how much money you’ll have to spend. 

Finally, sales forecasts help with finding investors for your business . If you’re looking for financial support to start your business, any investor you approach will likely be interested in the amount of money you expect the business to make. If you’ve created a sales forecast, you’ll be able to provide this information.

Large, well-established businesses rely on the sales figures of previous months to calculate their sales forecasts for the future. While having previous sales figures helps create more accurate forecasts, it’s not essential. There are a couple of methods new businesses can use to calculate their sales forecasts, even if they don’t have a sales history to look back at.

It’s always a good idea to research the competition when you’re setting up a new business. This is also true when calculating a sales forecast, but it depends on the type of businesses that make up your competition.

If any of your competitors are registered with the government as limited companies , they will have to make their accounts publicly available. These accounts will contain things like their monthly expenses, total profits, and (most importantly) the money they’ve made from sales. 

Using this last figure, you can work out how much your competitors are making from sales each month, and get a reasonable estimate of your own sales. You can find these accounts by searching for your competitor’s business on Companies House .

Please note that this method isn’t effective if your competitors are sole traders , as this means they won’t need to publish their accounts publicly. In this instance, you should use the forecasting method below. 

This method is known as ‘bottom-up’ forecasting, as you start at the bottom — your potential market of customers — and then work up to a forecast — the percentage of those customers that make a purchase.

The first step of this method is identifying your target market . This is the section of the population that you think will be interested in your product. With a little market research — things like sending out surveys, or posting polls on social media — you can work out how many people are in your target market. 

Once you have the size of your target market, you need to make realistic estimates of how many people will make a purchase. For example, if 1000 people in the local area are potential customers, you should expect 10% to visit your store or website, and 1% to actually make a purchase.

This method of calculating a sales forecast is good because it’s very adaptable. If you get many more or far fewer sales than you originally calculated, then you can adjust your figures accordingly and record the new forecast. 

It’s also a good idea to categorise this sort of sales forecast. Instead of estimating your overall sales, estimate the sales of each type of product you sell. That way, you can use the forecast to work out how many of each product to make or order each month. 

Creating a sales forecast is a great start, but it’s only the first part of managing your sales revenue. Once you start making sales and money starts coming in, you’ll need to track that cash so you can work out where to spend it. If you think you might have trouble with this, try using a financial software tool like Countingup.

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!  Find out more here .

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How to Forecast Sales

Yes, you can forecast your sales. Don’t think you need to have an MBA degree or be a CPA. Don’t think it’s about sophisticated financial models or spreadsheets. I was a vice president of a market research firm for several years, doing expensive forecasts, and I saw many times that there’s nothing better than the educated guess of somebody who knows the business well. All those sophisticated techniques depend on data from the past. And the past, by itself, isn’t the best predictor of the future. You are. So let’s look at how to forecast sales, step by step.

Your sales forecast won’t accurately predict the future. We know that from the start. What you want is to understand the sales drivers and interdependencies, to connect the dots, so that as you review plan vs. actual results every month, you can easily make course corrections.

If you think sales forecasting is hard, try running a business without a forecast. That’s much harder.

Your sales forecast is also the backbone of your business plan. People measure a business and its growth by sales, and your sales forecast sets the standard for expenses, profits and growth. The sales forecast is almost always going to be the first set of numbers you’ll track for plan vs. actual use, even if you do no other numbers.

If nothing else, just forecast your sales, track plan vs. actual results, and make corrections; that’s already business planning.

Match Your Forecast to Your Accounting

It should be obvious: Make sure the way you organize the sales forecast in rows or items or groups matches the way your accounting (or bookkeeping) tracks them.

Match your chart of accounts, which is what accountants call your list of items that show up in your financial statements.

If the accounting divides sales into meals, drinks, and other, then the business plan should divide sales into meals, drinks, and other. So if your chart of accounts divides sales by product or service groups, keep those groups intact in your sales forecast. If bookkeeping tracks sales by product, don’t forecast your sales by channel instead.

If you’re planning for a startup business, coordinate the bookkeeping categories with the forecasting categories.

Get your last Income Statement (also called Profit & Loss) and keep it in view while you develop your future projections.

• If you don’t have more than 20 or so each rows of sales, costs, and expenses, then make the rows in the projected statement match the rows in the accounting.
• If your accounting summarizes categories for you – most systems do – consider using the summary categories in your business plan. Accounting needs detail, while planning needs a summary.

If your categories in the projections don’t match the accounting output, you’re not going to be able to track plan vs. actual well. It will take retyping and recalculating. And you’ll lose the most valuable business benefit of business planning: management, steering your company.

The math is simple

Normally your sales forecast will group sales into a few manageable rows of sales and show projected units, prices, and sales monthly for the next 12 months and annually for the second and third years in the future. Here’s a quick example from the bicycle retailer named Garrett I’ve used in other examples (with columns for April-November hidden on purpose, to make viewing easier):

The math for a sales forecast is simple.

• Multiply units times prices to calculate sales. For example, unit sales of 36 new bicycles in March multiplied by $500 average revenue per bicycle means an estimated $18,000 of sales for new bicycles for that month.
• Total Unit Sales is the sum of the projected units for each of the five categories of sales.
• Total Sales is the sum of the projected sales for each of the five categories of sales.
• Calculate Year 1 totals from the 12 month columns. Units and sales are sums of the 12 columns, and price is the average, calculated by dividing sales by units.
• The numbers for Year 2 and Year 3 are just single columns; unless you have a special case, projecting monthly results for two and three years hence is overkill. It’s a problem of diminishing returns; you don’t get enough value to justify the time it takes. Other experts will disagree, by the way; and there may be special cases in which extended monthly projections are worth the effort.

Estimate Direct Costs

A normal sales forecast includes units, price per unit, sales, direct cost per unit, and direct costs. Direct costs are also called COGS, cost of goods sold, and unit costs.

Most people learn COGS in Accounting 101. That stands for Cost of Goods Sold, and applies to businesses that sell goods. COGS for a manufacturer include raw materials and labor costs to manufacture or assemble finished goods. A bookstore’s COGS include what the store owner pays to buy books. COGS for a bicycle store owner are what he paid for the bicycles, accessories, and clothing he sold during the month. Direct costs are the same thing for a service business, the direct cost of delivering the service. So, for example, it’s the gasoline and maintenance costs of a taxi ride.

Direct costs are specific to the business. The direct costs of a bookstore are its COGS, what it pays to buy books from a distributor. The distributor’s direct costs are COGS, what it paid to get the books from the publishers. The direct costs of the book publisher include the cost of printing, binding, shipping, and author royalties. The direct costs of the author are very small, probably just printer paper and photocopying; unless the author is paying an editor, in which case what the editor was paid is part of the author’s direct costs.

The costs of manufacturing and assembly labor are always supposed to be included in COGS. And some professional service businesses will include the salaries of their professionals as direct costs. In that case, the accounting firm, law office, or consulting company records the salaries of some of their associates as direct costs.

The illustration below shows how Garrett uses estimated margins to project the direct costs for his bicycle store. For the highlighted estimates, the direct entry for bicycles unit cost is the product of multiplying the price by 68 percent. The total direct costs for bicycles in January are the result of multiplying 30 units by $340 per unit.

Some Quick Notes About Standards

Timing matters.

Standard accounting and financial analysis have rules about sales and direct costs and timing. A sale is when the ownership of the goods changes hands, or the service is performed. That seems simple enough but what happens sometimes is people confuse promises with sales. In the bike store example, if a customer tells Garrett in May that he is definitely going to buy 5 bicycles in July, that transaction should not be part of sales for May. Garrett should put those 5 bicycles into his July forecast and then they will actually be recorded as sales in the bookkeeping actual sales in July when the transaction takes place. In a service business, when a client promises in November to start a monthly service in January, that is not a November sale.

Direct costs also happen when the goods change hands. Technically, according to accounting standards (called accrual accounting), when Garrett the bike storeowner buys a bicycle he wants to sell, the money he spent on it remains in inventory until he sells it. It goes from inventory to direct costs for the income statement in the month in which it was sold. If it is never sold, it never affects profit or loss, and remains an asset until some day when the accountants write off old never-sold obsolete inventory, at which time its lowered value becomes an expense. In that case it was never a direct cost.

What’s Accrual Accounting and Why You Care

Business accounting is either cash basis or accrual . I hate how attractive “cash basis” sounds, because accrual is way better, and easier to manage too. Cash basis accounting only works right if you absolutely always pay immediately for every business purchase, and you never buy something before you sell it, and all of your customers pay you in full whenever they buy something from you. So accrual is better.

Here’s why, in a few obvious examples.

• You make a sale when you deliver the goods. If the customer doesn’t pay you immediately, in cash basis nothing is recorded. The sale doesn’t even show up in your books until the customer pays. In accrual, you record the accrued amount as Accounts Receivable, so you keep track of the amount, the date, and the customer who owes it to you. It’s obvious that unless you never sell without immediate payment, accrual basis is better.
• You order some goods. When you receive them, you don’t pay for them. You owe the money. You have an invoice to pay. In cash basis, nothing happens until you pay up. In accrual basis, you record the accrued amount as Accounts Payable, along with the date, a record of what you bought, and who and when you are supposed to pay. So cash basis is better only if you pay everything immediately; all normal businesses need accrual.

I hate the fact that the accounting standards set a few generations ago chose to call it “cash basis” when you don’t record money owed into your books until it’s paid; or money you owe until you pay it. It’s a terrible idea to keep that information in your head instead of in your bookkeeping. That causes many mistakes as we business owners fail to keep track and remind ourselves of these outstanding obligations. And yet, ironically, they call that “cash basis” accounting. I do wish that the right way to do it, which is accrual accounting, didn’t have such an off-putting name.

Gross Margin

Once you have sales forecast and direct costs, you can calculate your estimated gross margin. Gross Margin is sales less direct costs. Gross Margin is a useful basis of comparison between different industries and between companies within the same industry. You can find guidelines and rules of thumb for different industries that give you an industry profile or average gross margin for different industries. For example, industry profiles will tell you that the average gross margin for retail sporting goods is 43%. Every business is different, but knowing the standards and averages gives you some useful comparisons.

The distinction isn’t always obvious. For example, manufacturing and assembly labor are supposed to be included in direct costs, but factory workers are paid sometimes when there is no job to work on. And some professional firms put lawyers’ accountants’ or consultants’ salaries into direct costs. These are judgment calls. When I was a young associate in a brand-name management consulting firm, I had to assign all of my 40 hour work week to specific consulting jobs for cost accounting.

Garrett can easily calculate the gross margin he’s projecting with his sales forecast. The illustration below shows his simple calculation of gross margin using his sales and direct costs.

How do I know what numbers to use?

But how do you know what numbers to put into your sales forecast? The math may be simple, yes, but this is predicting the future; and humans don’t do that well. Don’t try to guess the future accurately for months in advance. Instead, aim for making clear assumptions and understanding what drives sales, such as web traffic and conversions, in one example, or the direct sales pipeline and leads, in another. And you review results every month, and revise your forecast. Your educated guesses become more accurate over time.

Use experience and past results

• Experience in the field is a huge advantage . In the example above, Garrett the bike storeowner has ample experience with past sales. He doesn’t know accounting or technical forecasting, but he knows his bicycle store and the bicycle business. He’s aware of changes in the market, and his own store’s promotions, and other factors that business owners know. He’s comfortable making educated guesses. In another example that follows, the café startup entrepreneur makes guesses based on her experience as an employee.
• Use past results as a guide . Use results from the recent past if your business has them. Start a forecast by putting last year’s numbers into next year’s forecast, and then focus on what might be different this year from next. Do you have new opportunities that will make sales grow? New marketing activities, promotions? Then increase the forecast. New competition, and new problems? Nobody wants to forecast decreasing sales, but if that’s likely, you need to deal with it by cutting costs or changing your focus.
• Start with your best guess, and follow up . Update your forecast each month. Compare the actual results to the forecast. You will get better at forecasting. Your business will teach you.

How to Forecast a New Business or New Product

What? You say you can’t forecast because your business or product is new? Join the club. Lots of people start new businesses, or new groups or divisions or products or territories within existing businesses, and can’t turn to existing data to forecast the future.

Think of the weather experts doing a 10-day forecast. Of course they don’t know the future, but they have some relevant information and they have some experience in the field. They look at weather drivers such as high and low pressure areas, wind directions, cloud formations, storms gathering elsewhere. They consider past experience, so they know how these same factors have generally behaved in the past. And they make educated guesses. When they project a high of 85 and low of 55 tomorrow, those are educated guesses.

You do the same thing with your new business or new product forecast that the experts do with the weather. You can get what data is available on factors that drive your sales, equivalent to air pressure and wind speeds and cloud formations. For example:

• To forecast sales for a new restaurant (there is a detailed example coming in the next section ), first draw a map of tables and chairs and then estimate how many meals per mealtime at capacity, and in the beginning. It’s not a random number; it’s a matter of how many people come in. So a restaurant that seats 36 people at a time might assume it can sell a maximum of 50 lunches when it is absolutely jammed, with some people eating early and some late for their lunch hours. And maybe that’s just 20 lunches per day the first month, then 25 the second month, and so on. Apply some reasonable assumption to a month, and you have some idea.
• To forecast sales for a new mobile app, you might get data from the Apple and Android mobile app stores about average downloads for different apps. And a good web search might reveal some anecdotal evidence, blog posts and news stories perhaps, about the ramp-up of existing apps that were successful. Get those numbers and think about how your case might be different. And maybe you drive downloads with a website, so you can predict traffic on your website from past experience and then assume a percentage of web visitors who will download the app (The following sections on Sample Sales Forecast for a Website and Sample Sales Forecast for Email Marketing offer more examples).

So you take the information related to what I’m calling sales drivers, and apply common sense to it, human judgment, and then make your educated guesses. As more information becomes available — like the first month’s sales, for example – you add that into the mix, and revise or not, depending on how well it matches your expectations. It’s not a one-time forecast that you have to live with as the months go by. It’s all part of the lean planning process.

Sales forecast depends on product/service and marketing

Never think of your sales forecast in a vacuum. It flows from the strategic action plans with their assumptions, milestones and metrics. Your marketing milestones affect your sales. Your business offering milestones affect your sales. When you change milestones — and you will, because all business plans change — you should change your sales forecast to match.

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How to Create a Sales Forecast Business Plan

Sales forecasting is a powerful way to improve decision-making and make smarter choices as a business. But the reality is, many organisations don’t get it right.

Accurate sales forecasts rely on astute insights driven from robust, holistic data. If your business has struggled to accurately predict future sales revenue in the past, our guide could help you get it right in the future.

Ready to get started? Use the links below to navigate or read on for our full guide to accurate sales forecasting.

Quick Links

What is a Sales Forecast?

Why is sales forecasting important, what factors can affect sales forecasting, how to create a sales forecast, tools to help with sales forecasting.

A sales forecast is an estimate of what a company will sell in a week, month, quarter or year. It’s used to predict future revenue, accounting for the number of units an individual, team or company is likely to sell over a set period.

Sales forecasting offers many benefits when leveraged as part of a broader business strategy. At all levels and across all functions within a business, forecasting can facilitate shrewd decision-making, whether that’s setting goals and budgets, prospecting for new leads, deciding on the best time to hire new staff, or effective stock management to help maximise cashflow.

Accurate sales forecasting is a projection of where a company will stand in the future. And that’s important, not only for business continuity and growth, but for cultivating credibility, trust and advocacy with key stakeholders – be it partners, investors, clients or customers.

Let’s take a look at some of the reasons why sales forecasting matters:

• Bolsters decision-making – accurate predictions about future revenue can facilitate improved decision-making across all business functions, from hiring managers tasked with recruiting new talent, to procurement teams discerning when and how much stock to source.
• Adds value to all business functions – sales forecasting defines the value brought by different departments across the business. It highlights how different functions and channels contribute to revenue generation, helping businesses manage their resources.
• Accurate sales and buying for reduced costs – a sales forecast simplifies inventory management, with accurate stock predictions reducing costs and freeing up valuable resources, like warehouse space.
• Allocation of sales and marketing budget – Forecasting helps account for peaks and troughs in sales, so you can assign marketing budgets and determine which products and services need attention.
• Guarantees timely recruitment and outsourcing to drive business growth – understanding the areas of your business that drive the most revenue can make for seamless recruitment. Reinvesting revenue in personnel is a seismic driver of business growth, and sales forecasting can help you decide where to make hires and when. Not only that, but it can help companies decide whether they should look at outsourcing or whether to bring outsourced activities back in-house, e.g., the use of courier companies versus investing in your own delivery fleet.
• Provides valuable revenue expectations to outside stakeholders, like investors – sales forecasting quantifies your revenue predictions, making it easier and less risky to attain outside support from investors and stakeholders.
• Allows for simple company benchmarking against competitors – where your business ranks against competitors is important, and sales forecasting highlights how your trajectory compares to your closest rivals.
• Offers a powerful means of motivating sales personnel – a sales forecast is the best way of benchmarking the performance of salespeople within your business. It’s also a great motivator, particularly for staff incentivised by the promise of commission.

Many internal and external factors can impact the accuracy of your sales forecasts. You’ll need to account for all sorts of influences when predicting sales activity, including:

• Economic uncertainty and conditions
• Competitor changes
• Market trends and seasonality
• Product changes and future innovations
• Internal pricing or policy changes
• Available marketing spend and budgets
• Staff levels (more or fewer sales personnel will affect figures, for example)
• Future business plans e.g., expansion or diversification plans

This isn’t an exhaustive list of factors that can affect sales forecasting, but it does provide a steer for the types of influences that you’ll need to factor into your predictions.

Sales forecasting isn’t rocket science, but it does require a methodical approach to guarantee accuracy. Here, we’ll demonstrate how to make accurate sales predictions in five easy-to-follow steps.

Step 1: Consider Sales History

The first step to accurate sales forecasting is to look not to the future, but the past. By examining sales data over the past 12 months, you’ll glean insights that you can use as the basis of your future sales predictions, noting things like volumes, trends, and seasonality changes that caused peaks and troughs in demand.

When exploring historic sales data, be mindful of your ‘sales run rate’ – the number of projected sales for a particular period. For example, sales data may reveal a large disparity between quarterly sales figures, affecting the overall run rate; you’ll need to factor this into your forecasts for the future.

Step 2: Anticipate Changes and External Influences

While historic sales data provides a clear view of when and where sales typically happen over a year, it doesn’t guarantee the same sales figures for the future. Depending on a plethora of external and internal influences, next year’s sales could be up or down – so how do you accurately predict future revenue?

Start by taking each influence in turn and assess how such a force would have impacted last year’s sales figures. For example, do you plan to increase prices over the next 12 months? If so, how might this affect sales in relation to previous figures?

Here are some of the factors you should consider when predicting future sales performance:

• Pricing changes – will your prices change? How might this affect custom?
• Customer changes and trends – are consumer trends turning in your favour, or going the other way? Market awareness is crucial for accurate sales forecasting.
• Promotions – do you have any sales or promotions lined up to increase demand? How might these affect sales targets?
• Product alterations – are you improving your products and services?
• Sales channels – do you plan to expand into additional sales channels in the near future or acquire new branches?

Step 3: Lean on the Right Systems for Accurate Data Capture and Analysis

Sales forecasting becomes much simpler and more accurate when the right tools are used to capture and analyse data. Integrated ERP software, for example, collates sales data from every channel of your business – including trade counter or EPOS sales, telesales, sales rep orders, ecommerce etc. – so you can make data-backed predictions with confidence.

A great example of the types of tools you can use for accurate sales forecasting is predictive stock management. Automating the forecasting process, it presents the user with a forecast prediction aligned to their stock preferences, e.g., how much buffer stock you want to carry, as well as stock lead times.

Presented with this data, the procurement team can then use their insight and knowledge to tweak this forecast where necessary. It’s a great example of the marriage of automation to reduce manual work, whilst still allowing people to have input on the end result.

Elsewhere, utilising customised dashboards or control desks, instead of static reports, to differentiate pipeline value by rep, branch, prospect customer etc., can give businesses dynamic information to adjust their forecasts and be agile around expectations and demand.

What’s more, clever use of the CRM in conjunction with opportunity probability management enables you to allocate an estimated percentage chance that you think you will win a sales deal. By giving each sales opportunity/quotation a probability, you can produce a sales weighting forecast that will give you a fairly accurate idea of what your sales will be.

This will give you a better chance of forecasting the revenue and stock position of months and years ahead.

Step 4: Align Sales Predictions with Your Business Strategy

Many businesses have a five-year plan, a strategy that looks to drive business growth and profitability. But remember, such a plan will impact sales in one way or another, so it’s important that you align your sales forecasts with your short and long-term business objectives.

Say, for example, your business plan sets out a period of growth in the form of new hires or the creation of a whole new department. How will this affect sales? And to what extent should it be factored into your revenue forecasts?

Aligning your business strategy and sales forecasts is a crucial step. It helps prioritise business activity, ensuring that the right decisions are made to drive the business forward.

Step 5: Set Out Your Sales Forecasts in the Right Way

Charts, graphs and annotations can all be used to set out your sales forecasts for the year ahead. These should be included in your business plan, providing an accessible means of sharing forecasts with key stakeholders, personnel and investors.

As well as charting forecasts in number terms, you should set out your sales strategy, including how you arrived at the quoted figures. This not only quantifies your reasoning, but serves as a reminder of the market position at the time of writing – something that could prove useful if you need to refer back to where the figures came from at a later date.

Sales forecasting can be a laborious process, particularly if you want to guarantee accuracy. There are, however, a range of tools and software which can be leveraged to automate some elements of the process, removing some of the legwork associated with sales forecasting.

At Intact, we’re well aware of the importance of sales forecasting – and the arduous nature of it. That’s why we offer specialist expertise and solutions to help automate and simplify the process, from ERP software and predictive stock management to data analytics tools designed to improve data-driven decision-making.

We hope this guide helps you take stock of sales forecasting. If you’d like to optimise this area of your business, the Intact team can help. For more information or to speak to a member of our specialist team, visit the homepage . Alternatively, for more help and advice on ways to manage your inventory, take a look at our free guide to effective stock management .

Fiona McGuinness

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Home > Financial Projections > Sales Forecast in a Business Plan

Sales Forecast in a Business Plan

The sales forecast sometimes referred to as the revenue forecast or revenue projection, is one of the most crucial set of numbers used in the business plan. Many of the numbers developed later in the financial projections such as inventory levels, staff costs, cash flow, funding requirements, and ultimately the business valuation, depend on the numbers used in the sales forecast.

Most sales forecasts will be wrong. Investors are not looking to see whether you can predict the future (you can’t), they are looking for you to demonstrate that you understand the issues that will impact on your forecast and to show that even in the worst case scenario, your business can survive.

Sales Forecast for New Business

A bottom up sales forecast should take into account many factors including the following:

Competitor Comparisons

If possible, start the sales forecast by looking at how others in the same industry (competitors) have performed over the past few years by obtaining copies of their published annual accounts. This will show at the very least whether the market for your product is growing or declining, and if the business is of a similar scale to your intended business, will show you the level of sales achievable, and how fast the sales can grow.

So for example, if you plan to open a retail outlet, monitor the number of customers passing, entering, and purchasing goods at a similar retail premises over say a period of a week. Using these estimates, and estimates of the average sale value per customer from sources such as trade magazines, it is possible to forecast the weekly sales for a typical retail outlet at that location.

If trade magazines and websites reveal the seasonality for the industry and show that this month normally represents 6% of annual sales, then the annual sales forecast might be 6,100 / 6% = 102,000 per year.

Business Operational Limitations

All businesses have operational limitations due to such factors as the number of staff, the size of the available premises, or the availability of finance. When producing a sales forecast it is important to check whether the forecast arrived at is achievable within the operational capabilities of the business.

For example, a restaurant has a given number of tables, seats and therefore covers available. The sales forecast needs to be developed such that the number of available covers is not exceeded. This can be seen in operation in our restaurant revenue projection template.

Market Research

The sales forecast can be improved using market research and customer surveys. By attending trade shows, interviewing a selection of potential customers, or placing a small advert for the product, it is possible from the numbers of positive responses, to estimate the number of customers your business is likely to get when it opens for trade. With this information, using the average sales value for the product, an estimated opening sales forecast can be developed.

Seasonality

The sales forecast needs to take into account the seasonality of the industry in which you operate. Few businesses have steady sales throughout the year. Many businesses are dependent on the weather or holiday periods such as Christmas, others are dependent on major trade show activity.

Rules of Thumb used in the Industry

Research in trade magazines and websites or discussion with people already in the industry will reveal any useful rules of thumb which can be applied to the business. For example it might be possible to estimate the level of repeat business using a rule of thumb.

One final approach, if information is not available, is to work out the sales forecast needed to generate the owner a required level of net income. While this approach will not have any foundation on which to support a financial projection, it will allow the owner of the business to decide whether the level of sales required is achievable before investing too much time and effort in the new venture.

Forecasting Sales and the Financial Projections Template

A good sales forecast should look five years ahead with the first year sales forecast on a monthly basis. How you forecast sales will depend on the type of industry in which it operates. We have created simple forecast templates for a number of industries, some which are listed below.

• Website Traffic Estimator
• Subscription Based Business Revenue Projection
• Multi-sided Platform Revenue Projection
• Vacation Rental Business Plan Revenue Projection

More templates are available in our Business Templates Section , and more will be added in the future. If your industry is not listed contact us and let us know, and we’ll try to help.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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How To Create Financial Projections for Your Business Plan

Building a financial projection as you write out your business plan can help you forecast how much money your business will bring in.

Planning for the future, whether it’s with growth in mind or just staying the course, is central to being a business owner. Part of this planning effort is making financial projections of sales, expenses, and—if all goes well—profits.

Even if your business is a startup that has yet to open its doors, you can still make projections. Here’s how to prepare your business plan financial projections, so your company will thrive.

What are business plan financial projections?

Business plan financial projections are a company’s estimates, or forecasts, of its financial performance at some point in the future. For existing businesses, draw on historical data to detail how your company expects metrics like revenue, expenses, profit, and cash flow to change over time.

Companies can create financial projections for any span of time, but typically they’re for between one and five years. Many companies revisit and amend these projections at least annually. 

Creating financial projections is an important part of building a business plan . That’s because realistic estimates help company leaders set business goals, execute financial decisions, manage cash flow , identify areas for operational improvement, seek funding from investors, and more.

What are financial projections used for? 

Financial forecasting serves as a useful tool for key stakeholders, both within and outside of the business. They often are used for:

Business planning

Accurate financial projections can help a company establish growth targets and other goals . They’re also used to determine whether ideas like a new product line are financially feasible. Future financial estimates are helpful tools for business contingency planning, which involves considering the monetary impact of adverse events and worst-case scenarios. They also provide a benchmark: If revenue is falling short of projections, for example, the company may need changes to keep business operations on track.

Projections may reveal potential problems—say, unexpected operating expenses that exceed cash inflows. A negative cash flow projection may suggest the business needs to secure funding through outside investments or bank loans, increase sales, improve margins, or cut costs.

When potential investors consider putting their money into a venture, they want a return on that investment. Business projections are a key tool they will use to make that decision. The projections can figure in establishing the valuation of your business, equity stakes, plans for an exit, and more. Investors may also use your projections to ensure that the business is meeting goals and benchmarks.

Loans or lines of credit 

Lenders rely on financial projections to determine whether to extend a business loan to your company. They’ll want to see historical financial data like cash flow statements, your balance sheet , and other financial statements—but they’ll also look very closely at your multi-year financial projections. Good candidates can receive higher loan amounts with lower interest rates or more flexible payment plans.

Lenders may also use the estimated value of company assets to determine the collateral to secure the loan. Like investors, lenders typically refer to your projections over time to monitor progress and financial health.

What information is included in financial projections for a business?

Before sitting down to create projections, you’ll need to collect some data. Owners of an existing business can leverage three financial statements they likely already have: a balance sheet, an annual income statement , and a cash flow statement .

A new business, however, won’t have this historical data. So market research is crucial: Review competitors’ pricing strategies, scour research reports and market analysis , and scrutinize any other publicly available data that can help inform your projections. Beginning with conservative estimates and simple calculations can help you get started, and you can always add to the projections over time.

One business’s financial projections may be more detailed than another’s, but the forecasts typically rely on and include the following:

True to its name, a cash flow statement shows the money coming into and going out of the business over time: cash outflows and inflows. Cash flows fall into three main categories:

Income statement

Projected income statements, also known as projected profit and loss statements (P&Ls), forecast the company’s revenue and expenses for a given period.

Generally, this is a table with several line items for each category. Sales projections can include the sales forecast for each individual product or service (many companies break this down by month). Expenses are a similar setup: List your expected costs by category, including recurring expenses such as salaries and rent, as well as variable expenses for raw materials and transportation.

This exercise will also provide you with a net income projection, which is the difference between your revenue and expenses, including any taxes or interest payments. That number is a forecast of your profit or loss, hence why this document is often called a P&L.

Balance sheet

A balance sheet shows a snapshot of your company’s financial position at a specific point in time. Three important elements are included as balance sheet items:

• Assets. Assets are any tangible item of value that the company currently has on hand or will in the future, like cash, inventory, equipment, and accounts receivable. Intangible assets include copyrights, trademarks, patents and other intellectual property .
• Liabilities. Liabilities are anything that the company owes, including taxes, wages, accounts payable, dividends, and unearned revenue, such as customer payments for goods you haven’t yet delivered.
• Shareholder equity. The shareholder equity figure is derived by subtracting total liabilities from total assets. It reflects how much money, or capital, the company would have left over if the business paid all its liabilities at once or liquidated (this figure can be a negative number if liabilities exceed assets). Equity in business is the amount of capital that the owners and any other shareholders have tied up in the company.

They’re called balance sheets because assets always equal liabilities plus shareholder equity. 

5 steps for creating financial projections for your business

• Identify the purpose and timeframe for your projections
• Collect relevant historical financial data and market analysis
• Forecast expenses
• Forecast sales
• Build financial projections

The following five steps can help you break down the process of developing financial projections for your company:

1. Identify the purpose and timeframe for your projections

The details of your projections may vary depending on their purpose. Are they for internal planning, pitching investors, or monitoring performance over time? Setting the time frame—monthly, quarterly, annually, or multi-year—will also inform the rest of the steps.

2. Collect relevant historical financial data and market analysis

If available, gather historical financial statements, including balance sheets, cash flow statements, and annual income statements. New companies without this historical data may have to rely on market research, analyst reports, and industry benchmarks—all things that established companies also should use to support their assumptions.

3. Forecast expenses

Identify future spending based on direct costs of producing your goods and services ( cost of goods sold, or COGS) as well as operating expenses, including any recurring and one-time costs. Factor in expected changes in expenses, because this can evolve based on business growth, time in the market, and the launch of new products.

4. Forecast sales

Project sales for each revenue stream, broken down by month. These projections may be based on historical data or market research, and they should account for anticipated or likely changes in market demand and pricing.

5. Build financial projections

Now that you have projected expenses and revenue, you can plug that information into Shopify’s cash flow calculator and cash flow statement template . This information can also be used to forecast your income statement. In turn, these steps inform your calculations on the balance sheet, on which you’ll also account for any assets and liabilities .

Business plan financial projections FAQ

What are the main components of a financial projection in a business plan.

Generally speaking, most financial forecasts include projections for income, balance sheet, and cash flow.

What’s the difference between financial projection and financial forecast?

These two terms are often used interchangeably. Depending on the context, a financial forecast may refer to a more formal and detailed document—one that might include analysis and context for several financial metrics in a more complex financial model.

Do I need accounting or planning software for financial projections?

Not necessarily. Depending on factors like the age and size of your business, you may be able to prepare financial projections using a simple spreadsheet program. Large complicated businesses, however, usually use accounting software and other types of advanced data-management systems.

What are some limitations of financial projections?

Projections are by nature based on human assumptions and, of course, humans can’t truly predict the future—even with the aid of computers and software programs. Financial projections are, at best, estimates based on the information available at the time—not ironclad guarantees of future performance.

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Product Forecast

Table of Contents

What is a product forecast.

A product forecast is a prediction of the demand for a new product. Product forecasting involves analyzing past trends, market conditions, customer feedback, and other data to determine the likely sales volume of a product when it is launched. Businesses use product forecasting to plan their production and marketing efforts accordingly. It also helps them measure their potential for success or failure with a particular product.

Product forecasting is an essential part of product management. By accurately predicting demand, businesses can ensure they have enough stock to cover expected orders without overstocking and risking financial losses. 

Furthermore, product forecasting can help enterprises make sales projections and assess their pricing strategy and adjust it if necessary to maximize profits. In addition, it can be used to identify areas where additional marketing could be beneficial to increase awareness and boost sales.

• Product forecasting
• Premarketing forecasting
• Forecasting demand for a new product
• New product demand forecast

Benefits of Product Forecasting

Product forecasting, or demand forecasting, is an essential tool companies use to anticipate customer demand and plan product launches accordingly. It provides critical market insights to help companies make better marketing, distribution, and product development decisions.

Plan for Product Launches

The main benefit of product forecasting is that it allows companies to plan and be proactive in their approach to product launches. It helps companies gain insight into which products are likely to be successful and which may need more research or attention before launch. 

Improved Customer Service

With product forecasting, businesses can ensure that they have enough products on hand to meet customer demands. This allows them to provide a higher level of customer satisfaction by avoiding product shortages and delays in delivery times. Furthermore, product forecasting can help businesses better understand the needs of their customers and plan for any potential changes in demand.

Understand Customer Sentiment

Product forecasting can also help a company understand how customers view their product offerings compared to others on the market. This can provide valuable insight into what features customers find most appealing when selecting a product, which is then used to modify existing offerings or create new ones for future product launches. 

Reduced Costs

By accurately forecasting product demand, businesses can reduce their overhead costs as they only need to purchase and carry the inventory necessary to meet customer demands. This also helps companies to avoid costly excess stock, which can lead to financial losses due to storage fees or products becoming outdated before being sold.

Improved Revenue Streams

Knowing exactly what products are in high demand allows companies to focus their marketing efforts on those items that can increase revenue streams by maximizing sales opportunities. Additionally, product forecasting helps companies determine the pricing of new products by providing insight into market trends and consumer behaviors and preferences.

Predict Inventory Needs

Finally, product forecasting increases efficiency in stock management and inventory control measures, allowing companies to optimize supply chains and storage space while maintaining sufficient inventory levels for maximum profitability. With reliable forecasts, businesses have greater visibility into potential issues that may arise regarding meeting customer demands and keeping up with changing industry trends. With this insight, they can proactively address any issues before a new product launch.

Methods of Forecasting a New Product

Accurately anticipating the demand for a product can give companies an edge over their competitors in the market. Various forecasting models can be used to forecast product demand, such as qualitative forecasting, quantitative forecasting, time-series analysis, and sales volume estimation.

Qualitative Forecasting

Qualitative forecasting involves using subjective judgments from experts or stakeholders to develop product forecasts. This method usually requires market research using interviews, surveys, focus groups, and other similar activities. It is particularly effective when limited data is available about an unfamiliar product or industry.

Quantitative Forecasting

Quantitative forecasting utilizes mathematical models to make predictions based on historical data, such as sales information and customer feedback. This type of forecasting is typically used to predict future trends in product demand by looking at past performance patterns. 

Time-Series Analysis

Time-series analysis is another type of quantitative forecasting that utilizes statistical techniques to evaluate relationships between variables over time and predict product sales based on these findings. Time-series analysis considers changes in product features and external conditions, such as economic developments and consumer preferences, so that more accurate forecasts can be made.

Sales Volume Estimation

Sales volume estimation is another popular method used for product forecasting. This technique estimates the number of units sold in a given period based on factors like manufacturer’s price discounts and promotions and market influences like competition and consumer behavior shifts. Sales volume estimates are essential for pricing strategies and inventory management plans for specific products or product lines.

Utilizing these methods for product forecasting can help businesses make better decisions regarding product development, marketing strategies, inventory management, pricing strategies, and more—allowing them to maximize their profits while meeting customer needs effectively.

Product Forecasting Challenges

Businesses face various challenges when forecasting demand for a new product. This can be especially difficult due to the lack of consumer data and the uncertainty around market acceptance.

Consumer Behavior

One of the most pressing issues is predicting consumer behavior. To forecast product demand, businesses must understand how their product fits into the larger market and how consumers will react to it. They need to have data on what features are attractive, which ones are not, and any potential substitutes that could replace their product in the market. This information can be hard to come by when launching a product for the first time, as there is no established record of consumer response or past sales analysis to draw on.

Estimating Product Life Cycles

Another challenge businesses face is estimating product life cycles. Designing a product with a long life cycle requires careful consideration of its components and production costs relative to its worth in the marketplace over time. Companies must anticipate changes in technology and economic conditions that may affect how well their product performs and consider any external factors, such as competitive pressures and government regulations, that may influence product performance or desirability.

Market Disruptions

Accounting for potential disruptions in the market is also difficult when forecasting new product demand. With ever-changing consumer preferences and technologies driving rapid transformation in many industries, businesses must be agile and adjust their forecasts accordingly. This can be especially tricky for products whose life cycles are short or evolving quickly due to technological changes or market saturation. Therefore, companies must constantly monitor these trends to ensure their product forecasts remain accurate.

Finally, pricing plays a vital role in new product forecasting. Factors such as production costs and competitive pricing must be considered when setting prices for a product. Pricing too high may scare off potential customers, while pricing too low may result in lower profit margins than expected. Therefore, businesses must find the optimal balance between price and profitability to maximize profits while still meeting customer needs and expectations effectively.

People Also Ask

How do you create a product forecast.

Creating an accurate product forecast is an essential part of product planning. It helps businesses to anticipate customer demand and develop strategies to meet their expectations. Product forecasting involves predicting the quantity of products customers will likely buy in a given period. The first step in product forecasting is to identify customer needs and preferences. Companies need to understand the product’s target market, including the demographic characteristics of its users, as well as their interests and buying habits. Businesses can use surveys, focus groups, interviews, or other data collection methods to gather information about customer segments. Once they have identified customer preferences, companies can estimate how much product will be needed based on historical sales patterns or market trends. The next step is to create a comprehensive forecast model that considers both external factors – such as economic conditions and competitive product launches – and internal factors – such as marketing campaigns or product launch dates. The model should also include historical sales data for past periods and projections for future periods to be used for both short-term and long-term product planning. Once the model has been created, it should be tested and validated regularly to ensure accuracy. Companies should also track changes in customer preferences over time to update their forecasts accordingly. By creating an accurate product forecast and keeping it up-to-date, businesses can more effectively plan for their product launches and anticipate customer demand.

Why is product forecasting important?

Product forecasting is an important part of product management , and it’s used to help companies plan for the future. It helps them anticipate demand for new products or predict which product features will be popular in the marketplace. It also helps companies forecast the resources needed to produce a product. Accurately forecasting product demand is essential for businesses to make sound decisions about product development, production, and inventory planning. Accurate product forecasting is essential for meeting customer needs and maximizing sales opportunities. Companies must have accurate projections of product demand to properly allocate resources and design marketing plans that tap into customer preferences. By anticipating product needs, businesses can better manage inventory levels and reduce backorders while minimizing costs associated with excess stock or lost sales due to insufficient inventory levels. Product forecasting also helps companies accurately estimate the cost of production, distribution, and customer service support by considering the cost associated with supply chain disruptions due to product shortages or delays in shipment arrivals. By better understanding customer needs, a company can plan and implement solutions to address potential problems before they occur.

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Building your company’s first forecast model and why it’s important [w/ template]

Dan Kang, VP of finance

Whether you’re a founder or an early-stage finance lead, you’ll probably reach a point where you’ll want — or need — to build a forecast model. Maybe it’s because you’re fundraising and investors are asking for projections. After funding, your investors and board will likely ask what your intentions are for their invested cash. You might have partners or vendors who want to understand your business’s viability through projections. Or, perhaps, you just feel like you’re running blind without some way to see how today’s decisions impact the future state of your business, especially in relation to cash burn. A forecast model can help you align on clear business goals and understand why those goals matter.

What is a forecast model?

A forecast model is a structured approach to understanding your company’s possible future financial performance based on various assumptions and business drivers. It’s more than just a spreadsheet; it’s a dynamic tool that pieces together every aspect of your business — how you acquire and retain customers, generate revenue, allocate resources, and manage cash flow. It helps you understand the full scope of your company, ensuring that decisions are made with the broader business context in mind.

A good forecast model should start with breaking down how you win new customers, retain them, drive revenue from them, support them, build new products, resources needed to run the business, all the way through to what your cash flows and runway look like. Additionally for the finance lead, you’ll also want to understand what all of this means for your financial statements.

Why is a forecast model important?

When you’re busy building your product, figuring out product-market fit, and dealing with hiring decisions, a forecast model — especially at an early stage — can seem like a waste of time. After all, things change quickly, and it can feel counterproductive to invest too much time into a bunch of forward-looking projections. But while it might not feel like a top priority, a forecast model can be an extremely clarifying tool when done right. Here are a few of the ways it can benefit your business:

It enables better cash management

One of the primary benefits of a forecast model is its ability to help you manage your finances effectively, particularly in terms of cash flow and runway. A forecast model allows you to project your income and expenses over time, giving you a clear picture of your cash flow. This projection helps you identify potential cash shortfalls well in advance, enabling you to take proactive measures to address them.

By regularly updating your forecast with actual data, you can also keep track of how your runway is evolving and make informed decisions about when to raise additional funding or cut costs to extend your operational timeline. This is especially crucial if your startup is still in its earlier stages, since this is the time when cash burn rates can fluctuate significantly as you scale your operations.

It’s a useful resource for stakeholders and vendors

A well-prepared forecast model isn't just for internal use — it's also a great way to communicate with investors, board members, and other stakeholders. It shows that you’ve got a clear, data-driven plan for growth, which can boost investor confidence and keep your board updated on how you're tracking against your goals. Plus, it helps you prove your business's viability to partners and vendors, building trust and strong relationships. By giving everyone a transparent look at your company's future, a forecast model helps align everyone with your strategic objectives and supports your startup's success.

It helps with prioritization

Oftentimes in startups, you’ll be making a series of decisions at the micro-level without understanding what the downstream or tangential impacts are. You may decide to invest more in marketing because early tests are working well, hire AEs because your pipeline is building up, hire more engineers to build out your product roadmap sooner, or purchase software that’ll make your operations more scalable. All of these decisions may be the right call when made in isolation but it’s easy to miss how they compound when you have limited cash and resources to deploy. This can leave you short-changed for things that may have been higher priority investment areas, so a forecast model can help you think about your investments in the larger context of your whole business, ensuring smarter decisions for long-term success.

It helps you establish important baselines

A well-built forecast model helps you think about the key drivers of your business and the metrics you need to move in order to achieve the outcomes you want. It gives you a much clearer sense for what “good” looks like, and what goals you should be targeting. For example, if you’re operating in a novel software space, having a sense for what a good retention rate looks like might be tough without readily available benchmarks. But looking at how customer churn rates impact your revenue growth can provide clarity of how good they need to be for you to drive growth of certain levels.

What should you consider when building your financial model?

To make sure that you’re building out your financial model with all of the right things in mind, it’s important to consider a few key pointers:

Make sure you understand the drivers of your business

A good forecast model is grounded in a deep understanding of what drives your business. This means knowing how you acquire new customers, retain them, and generate revenue. It’s not just about crunching numbers — it’s about understanding the underlying realities those numbers represent.

Remember that the right level of granularity matters

Striking the right balance in the level of detail is crucial. Too much granularity, especially in the early stages, can be a waste of time as your business may change rapidly. However, as you grow, you’ll need to segment and cohort your forecasts to capture important trends that could impact your scalability.

Consider strategic vs. technical accuracy

While it’s important for your forecast to be technically accurate, it’s even more crucial that it helps you answer key strategic questions. A model that’s technically correct but fails to provide strategic insights is of little use.

Do some scenario planning

Forecasting is an exercise of contemplating the multiverse of possible paths forward and results (think Dr. Strange in Infinity Wars ). You want to contemplate the range of possible outcomes versus thinking of forecasting as having a single path for the future or trying to predict a single outcome. By considering a range of scenarios, you’ll be better prepared to navigate uncertainties and make informed decisions.

Here are a two examples that illustrate how having different scenarios can play different roles, depending on the situation:

• For fundraising, you may want to show a forecast that illustrates how you think about attacking your market and winning. The goal isn’t to simply show very large numbers, but to also show how you think about getting there from where you are today, regardless if you’re starting at pre-revenue or at $100M looking to hit your next milestone.
• For operating, you’ll want a more conservative set of numbers so that if your top-line revenue estimates don’t pan out exactly as planned, you’re not over-committed on headcount or expenses. You should regularly assess your confidence level for certain outcomes and make sure you’re appropriately investing in the right areas that’ll be most impactful for your business and increase that confidence level.

Mistakes to avoid when building your financial model

Just as there are important things to keep in mind that can guide your financial modeling, there are also a few mistakes you should be careful to watch out for. Here are a few of the don’ts to go along with the do’s:

Treating it like a spreadsheet exercise

A forecast model is more than just a collection of numbers in a spreadsheet. Each figure should reflect a real-life decision or operational factor. For example, the line item for R&D isn’t just about how much you’re spending on research and development; it’s about understanding whether you’re thoughtfully scaling up the engineering organization over time and allocating resources across product and other areas appropriately.

Predicting the future instead of setting goals

Your forecast should be a tool for setting and tracking goals, not a crystal ball for predicting the future. For example, rather than trying to guess your revenue in six months, use your forecast to set customer acquisition and retention targets that will help you achieve your desired revenue outcome.

Relying too much on “modeling math”

While mathematical models can be useful, they should not replace common sense. When forecasting expenses, for example, don’t just rely on percentage-based models, particularly at the early stage; think about what drives those expenses and how they align with your strategic priorities. This involves understanding who are the vendors used, why you use them, and how those costs scale. Assumptions like rolling averages and such certainly have a place in the model but be thoughtful about what the real-life implication of these types of assumptions may be.

Overcomplicating early models

In the early stages, avoid getting bogged down in unnecessary complexity. Focus on the big picture and build out more detailed models as your business grows.

Missing the strategic lens

A technically correct model that doesn’t help you answer key strategic questions is not impactful. Always ensure that your forecast is aligned with your broader business strategy.

[TEMPLATE] Building your model and tips to consider

Every business is different, which inherently means that every forecast model will look different. There are a few high-level categories within the model that will be relevant regardless of industry (e.g., customers, revenue, expenses), but the way those are broken out — as well as what additional information goes into the forecast — will vary company by company.

To help get you going, we’ve built a starter forecast model that you can leverage as a template. Our forecast model template is not intended to be taken as recommendations for how to operate. The model is populated with dummy data so you founders and finance leads can see how the full model works mechanically. It is by no means what an expected path looks like or how driver inputs should be assumed. 1 Access our template here .

While a decent portion of the model is designed to be business-agnostic, it’s designed to serve as an example of a fully functioning forecast model for a fictional software company. The idea is to use this as a foundation or set of building blocks for what your own company’s model will look like — you just have to make it your own.

Below, we outline a few of the core forecast model components that you’ll see in our template — we break down what they are, as well as how to update each element in the context of our provided template. The reference numbers in each section heading correspond with column B in the provided forecast model template for easy navigation. Keep in mind that in an effort to balance simplicity with usefulness, we’ve kept this list to the basics. There are plenty of other forecast components we haven't included, but you can always update to suit your needs. If you're a founder, the level of complexity in this model will probably feel stretchy already. If you're a finance lead, I'm sure you see lots of missing areas to include or expand upon.

Lastly before we jump into the forecast model, a note: forecast models don’t exist in a vacuum and should bridge both actual results and projections. This means that many of your model assumptions will depend on having solid actual numbers across both growth, customer, and financial data. Building the forecast model can also help you understand where data gaps exist today for your business. Work with your team and accountant if you have one to collaborate on the right data infrastructure to support this effort.

Here are the key sections and inputs you’ll see in this model. First, save a copy of the template, make sure you’re mindful of the access settings (or download as an Excel spreadsheet), and you should be good to edit and make your own.

Key metrics summary (Ref 3)

It’s always helpful to have a quick snapshot summary of your forecast up top so you can easily monitor how assumption changes drive different outcomes. When sharing your forecast with your investors, board, or internally, think about the right level of detail to surface. What’s shown in the template is meant to be illustrative; something that you can build upon for the most important metrics in your business.

New customers (Ref 4)

Think about how you’re acquiring new customers and what channels make sense for your target market. Channel mix and performance will look different if you’re selling to consumers vs. small businesses vs. enterprises. It will also look different based on the nature of your products. Keep assessing what’s working vs. not and test new channels and methods that make sense for your target customers. Customer acquisition costs typically get more expensive with scale and as competition increases so think through how you expect channels to scale and don’t depend on early data to always hold true. Also think about what you consider an “acquired customer.” If you have a lot of customer signups that don’t translate into active users, you probably want to measure “acquired customer” differently than a user account creation.

Using the template: The template shows a very simple way you can break down your new customer acquisition channels and what drives them:

• Performance marketing (Ref 5) (e.g. social media ads) where there’s strong ability to track direct results (versus brand marketing where it’s much more difficult to track the return on spend) is typically thought of in terms of spend, customer acquisition cost (CAC), and new customers (before you head into much more complex territory here). The marketing spend buckets can be populated down in the Expenses section (Ref 10). Then input a CAC to calculate the forecasted number of new customers from performance marketing. CAC may be volatile in the early periods and will also depend on your product, target market, seasonality, advertising creatives/copy, and competition. If available, benchmarks can be helpful here. Play around with different levels of CAC to better understand what level of spend efficiency is needed to meet your growth goals.
• Sales (Ref 6) may be a bigger growth channel if your product is selling to larger businesses. The sales funnel can be built out in much greater detail but ultimately is driven by productivity of your sales organization and how many customers they win. The Sales AE Headcount will auto-populate based on the employees/future hires who are tagged to the Sales team in the “People” tab of this template. From there, you’ll want to input what you think the productivity (deals won per Sales person) could be over time, taking into account what sales cycles may look like for your market and ramp periods.
• Organic (Ref 7) is notoriously difficult to forecast and attribution can become misleading even with the best tools and complicated frameworks. Some businesses see a relatively stable base of organic activity while others see very seasonal or volatile trends. Use your judgment here for what makes sense but err on the conservative side — just because you plan to spend a lot on brand marketing, that doesn’t mean you’ll see an immediate return. The impact of those dollars may take a long time to be realized, if at all. (This isn’t to diminish the value of brand marketing — the function is hugely important for a number of reasons, even if the ROI isn’t always super clear cut from a numbers perspective.) The template is set up as a hardcode but could be changed to assume some correlation to total marketing spend or as a percentage of total new customers as possible options. Make sure you do backtest whether the assumption methodology holds true though as you gain more data with subsequent periods of actual data.

You may have other channels not reflected here (e.g. partnerships, affiliates) but can probably use similar simple logic to start.

Customer retention (Ref 8)

Acquiring new customers doesn’t matter if you lose them quickly and don’t build a longer-lasting relationship with them. Take time to understand how your customers stick with your company over time and test various definitions of retention that provide an accurate measure of customer relationship. If you’re a monthly subscription business, this may just be whether the customer paid or not in a given period. If your business model is volume-driven, maybe the definition should be based on a certain activity (repeat purchases, for example). A popular, simple way you’ll see to model out retention and churn is to apply a simple monthly churn metric for the entire customer base, but this doesn’t factor in any real understanding of individual customer cohorts, their behaviors, and how they trend over time. Depending on the size of each cohort, improving/declining quality, and survivorship bias for that product, a monthly churn rate can drastically misrepresent what’s happening at a deeper level. Retention rates can also be very clarifying on whether you truly have product-market fit, whether you’re acquiring the right type of customer through your acquisition channels, and other product strategy questions.

Using the template: The template provides a simple way to use an assumed cohort retention curve (Ref 9) to model out how the cohort behavior translates to overall customer growth.

• The cohorts here are established based on the month customers were acquired. A different cohort definition may make sense for your business (e.g. first time taking a specific action). Before jumping into this forecast, do the data work to determine what the right measure of retention is for your business.
• As you input actual data (blue font in Ref 10) over time, the retention rates will auto-calculate down below (Reg 11).
• For non-actual periods for a given cohort, based on how many months it’s been since the cohort start, the formulas will apply the month-over-month change rate for a given cohort month to the prior month’s retention rate. This survival rate is used rather than pulling in the retention rate directly from the assumed curve (Ref 9) to account for variability in each cohort’s behavior to avoid unrealistic changes in their curves. For future cohorts, the retention rates will be exactly the same as the assumed curve.

Revenue (Ref 12)

Think about what type of customer activity is the direct driver of revenue and make sure you’re capturing trends there appropriately. In a B2B software business, it might be as simple as the customer agreeing to pay a certain price over a certain period of time. In other businesses, it may be tied to specific customer actions or activity. Really spend time understanding customer behavior and trends you see there. Talk to your customers to better understand why they behave the way they do.

Using the template: The template treats this very simply based on simple averages, which may work fine in the earlier stages of a business if average revenue per user (ARPU) is fixed or relatively stable.

• For subscription revenue (Ref 13), input the assumed average monthly price across your subscriber base. If your company is further along, you’ll likely want to further cohort and segment this portion of your model to account for things like price increases over time, shifts in customer profiles, etc.
• For activity-driven revenue (Ref 14), input the assumed average activity volume and the average take rate if applicable for your product. Similarly, this will likely require further cohorting and segmenting with scale.

Expenses (Ref 15)

A traditional income statement (known also as a P&L statement , for “profit and losses”) breaks down expenses in terms of: cost of goods sold (COGS), research and development (R&D), general and administrative expenses (G&A), and sales and marketing (S&M). Those groupings are helpful and should be part of how you understand your business, but it may be preferable to break out expenses in a way that you can very tangibly understand what exactly you’re spending money on (e.g. salaries, professional services, software, hosting, etc.). The simple way to think about forecasting expenses is to think about your own personal finances and how you manage a budget. Table out what you plan to spend across different expense categories, who exactly you’re paying, how contracts with existing vendors work, and what money you’re setting aside for future spending needs.

Oftentimes folks will model these out using “modeling math,” like using “% of revenue” methods, for example. This makes sense when you’re analyzing companies and don’t have the actual control to influence the decisions. But in this situation, you do control the decisions, so set budgets that reflect your strategic priorities and hold your teams accountable to them. A lot changes in a startup even over the course of a quarter, but by having a clear number to start, you’ll understand how changes over time keep you on (or take you off) course, particularly in regards to cash burn. This can help you make the right trade-off decisions.

An important thing to keep in mind when it comes to expenses is that, for most startups, people-related expenses will be your largest area of spend — and this will need to factor into your forecast as well. Getting this wrong can lead to difficult spirals of layoffs, negative press, low employee morale, etc. From the early days, develop the muscle of prioritizing hires over the next few months and regularly assessing with your team where the needs are and why. Formalize these into hiring plans with market-informed assumptions on compensation so you’re not surprised by how quickly people related expenses build up.

Using the template: The template breaks out in the Expenses section a simple way to build out your budgets for each of the expense categories. If you have unique expenses not captured here, spend time thinking about which of your expenses are inputs vs. outputs. Inputs are the ones you have control over spending (e.g. marketing spend) whereas outputs are the ones that are the result of another item (e.g. payroll taxes driven by headcount and salaries paid).

• For software companies, hosting services may be the main cost here. For an ecommerce company, inventory will likely be the main cost. For services, the cost of the team delivering the service.
• Note that in a traditional GAAP income statement, personnel expenses related to customer support is typically included in COGS. This income statement is meant more for internal operating purposes vs. external reporting where GAAP treatment of financials can be more important depending on the audience.
• Understanding COGS is important to understand your business’s gross margins, and the first step in assessing scalability over time. High margins can mean more cash flow to help fund additional hiring or growth investments, while low margins mean you’ll need to focus on driving high volume to build a scalable business. (This isn’t necessarily a bad thing — it may be the nature of the industry you play in.)
• Marketing spend (Ref 17) can be inputted based on the investment decisions you’ve made. Remember, you typically have control over what you spend so build a marketing plan that thoughtfully considers the best way to allocate spend here. The performance marketing budget will drive new customer acquisition as mentioned above. Brand Marketing and Events & Conferences do not impact new customers and growth as modeled here — you may find that for your business there is a more defensible connection, and these should in fact be treated as drivers.
• The “People” tab will auto-populate the Salaries portion of the forecast model based on the Salary and Start Date information. The Start Month will auto-populate based on the Start Date and capture those roles in the Salaries portion. The headcount number in the Key Metrics Summary will also update based on the inputs here.
• If an employee is terminated, keep them in the list and enter the Termination Date. This will auto-populate the Termination Month and subtract the terminated role's salary from the Salaries portion of the model if upcoming.
• If your company has a sales motion, headcount noted as "Sales" in the Team column of the “People” tab will auto-populate the Sales AE Headcount row. (Note that the tag in the Team column will need to match this exactly, or you’ll need to update the related formula in the model to reflect the corresponding tag you wish to use for sales headcount in the “People” tab.)
• Remember, the roles in the template are made up roles populated for the sake of exhibiting how the forecast model works. This is not intended to be a recommendation on compensation levels, scaling, or sequencing of hires.
• Payroll tax, benefits, travel & meals expenses are outputs based on hiring and salaries. Input their assumptions to populate these expenses.
• Non-personnel expenses (Ref 19) can be a mix of inputs and outputs. Rent & office expenses are usually fixed based on a lease schedule, whereas professional services have a level of discretion to them like marketing spend. Software expenses can grow large if not monitored and, depending on your vendors, can scale directly with employees or indirectly with customers or other operations (for example, if you need to pay more for additional seats with particular tools).

Financial statements (Ref 20, 25, 28)

If you’re a founder this might feel intimidating, but it doesn’t have to be. Understand how the various items roll up into your P&L and how your balance sheet items and cash balance change over time. As an early-stage company, you may still be performing cash accounting and not GAAP accounting (aka accrual-based accounting ) and hence won’t have many balance sheet items. When you bring on an outsourced accountant, part-time CFO, or your first finance hire , make the investment to make the switch as a better way to understand the truths of your business. If you’re a founder, there may be balance sheet concepts that are new (e.g. net working capital) that may be valuable to manage your business and cash runway that may not be appreciated when only looking at your P&L. Tracking how your cash balance trends month over month in the forecasted period is really the best way to understand your cash runway. (Simply dividing your cash balance by last month’s change in cash balance or EBITDA doesn’t reflect how you expect your business to change over time.)

Using the template: The template provides a forecast for all three key financial statements (income statement, balance sheet, and cash flow statement). The financial statements are mostly automated and really a result of the work you did for the above sections but there are items that’ll need some ancillary assumptions to work. That said, you should still take time to really understand your company’s financial statement. They’ll ultimately be the measuring stick for how your business is doing beyond the early phases, cutting through the hype of vanity metrics.

• If you’re working with an accountant to properly capitalize fixed assets, you’ll likely have Depreciation & Amortization (Ref 21) to expense them over time. If your business is heavily capital-intensive (e.g. need to invest a lot of cash upfront for buildout of servers or buildings, for example), getting this right will be important to understand your cashflow dynamics. If you’re not working with an accountant for GAAP accounting or you’re not running a capital-intensive business, you mayyou’ll be fine ignoring this in the early days.
• Stock-based compensation is a real thing, even if non-cash and associated with giving employees equity awards. In the early days, you can ignore this, but it’s included in the template here for more mature companies that have started to record this.
• Interest expense and income are related to what you pay on any debt and yield on invested cash, respectively. Input the associated annual rates in the assumption rows (Ref 23) and these items will calculate based on the outstanding debt and treasury balances.
• Taxes, if profitable, can be calculated in the template using a simple effective tax rate assumption. Consult with a tax advisor to better understand your tax situation though as this may be too simplistic for your business. There’s a lot of complexity here around how expenses are treated for tax deduction purposes, which tax credits you may be eligible for, and the possible usage of prior net operating losses (NOLs) to offset tax liabilities.
• Working capital items (Accounts Receivable, Prepaid Expenses, Credit Cards, Accounts Payable, Accrued Expenses shown in the template) (Ref 26) can be easily forecasted based on ratios that tie those balances to the underlying activity that causes them.
• Fixed Assets (Ref 26) reflect long term assets that the company has purchased. Rather than treating these expenditures as expenses through the P&L, GAAP capitalizes them based on a capitalization policy (puts them on the balance sheet vs. income statement) and recognizes their expenses over their useful life. As noted above on Depreciation & Amortization, your business may be too early to spend meaningful time here. If you’re a finance lead, you’ll want to build a fixed asset schedule to properly forecast for these.
• Venture debt (may be other forms of debt too) (Ref 27) is populated based on the debt drawdowns (not available credit which isn’t reflected in a balance sheet) captured in the Cash Flow Statement. Equity (Ref 27) is populated based on equity proceeds captured also in the Cash Flow Statement.
• Make sure your balance sheet actually balances (Total Assets = Total Liabilities + Total Equity). If not, something is broken in the forecast model.
• If you’re not at the point of having a more detailed balance sheet per GAAP, don’t worry — you can still use this template easily. Just zero out the working capital items (Ref 26) and the Assumptions associated with them other than your credit card balance which you can track and record.
• Cash from Operating Activities: removes the impact of working capital changes (Ref 26) and non-cash expenses (Ref 21 and 22) to measure how much cash came from your business’s core operations. This section is fully auto-populated.
• Cash from Investing Activities: the term “investing” is from the company’s perspective where capital is used for long term assets (capital expenditures or capex) and ties into the Fixed Assets and Depreciation & Amortization lines discussed above (Ref 21).
• Cash from Financing Activities: this is where you reflect cash coming into the business from debt proceeds (convertible note, venture debt, working capital line, SMB loan, etc.) and equity proceeds from investors.
• Based on the above, your change in cash and ending cash balance is calculated for the forecast periods.

As you digest this and begin putting it into practice, remember to make the template forecast model your own. Again, there are lots of derivative metrics that you can add which have been excluded in the spirit of keeping this as simple as possible. Spreadsheets are always flexible so play around with things and remember to always ground the forecast in your business and how you think about the strategic priorities for the company.

For the non-finance folks who are adventuring into the world of financial forecasts and may not be at home in spreadsheets, don’t be intimidated. Just remind yourself that spreadsheets are much easier than writing engineering code or people management which you’re probably doing as a non-finance founder.

And most importantly, remember to use the forecast model as a living, breathing management tool for your company. Update it after each month with actuals, understand how you’re performing to the forecast and why, and use it to uplevel your own command of your business.

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The 10 steps of demand forecasting for new products

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The platform for orchestrating performance.

Follow these best practices for more accurate demand forecasting and more cost-efficient product launches.

Demand forecasting for new variants of existing products is difficult enough. But forecasting for radically innovative products in emerging new categories is an entirely different ball game. There are no past trends to reassuringly extrapolate into the future, just a ton of uncertainty about whether the latent demand that marketing suggested to secure the R&D funding is real or not.

And after so much investment, the board is convinced this is the product that is going to become the next cash cow. Sure, you could manage their expectations by reminding them that something like 80% of new products fail and name-drop a few of the spectacular flops of Fortune 500 companies. But that would be career limiting. A better alternative is to take control of the situation by following these 10 steps of demand forecasting best practices that have a proven track record of success.

Want to enhance your company’s product demand forecast? Check out this playbook, featuring specific guidance for the life sciences industry.

Step 1: Make it a collaborative effort

Identify a handful of key people from marketing, sales, operations, and relevant technical departments and form a working group. This core team will be responsible for developing and managing the reforecasting process through the launch period until  demand planning  becomes more predictable.

Step 2: Identify and agree upon the assumptions

Collectively review all the available qualitative and quantitative data from market research, market testing, and buyer surveys. Use the data to identify a set of assumptions that can form the basis of a demand forecasting model.

Ideally this will include assumptions about:

• Number of consumers in the target market
• Proportion expected to buy the product
• Anticipated timing of their purchase
• Patterns of repeat purchasing and replacement purchasing

Be prepared to commission additional research or consult external industry experts to fill any important data gaps. And always let the working group use their collective judgment to identify a realistic range of values for each assumption.

Step 3: Build granular models

Not all consumers will purchase a new product at the same rate. Some may be prepared to queue all night around the block to get their hands on it, but others will want to wait for subsequent versions when any unforeseen bugs are fixed and prices are typically lower. Build a sufficiently granular forecasting model reflect how and when different market segments in different geographies might purchase the product and at what price.

Step 4: Use flexible time periods

Sales over the first few days and weeks in the life of any new product need to be carefully monitored as they will quickly show how demand is likely to grow in the future. Although the sales and finance function may only be interested in monthly data, it pays to develop detailed daily forecasts for the first quarter against which to track actual sales.

Step 5: Generate a range of forecasts

Run through a number of iterations, changing various assumptions and probabilities in the model to generate a range of  forecasts . This is easily done if a modelling solution that can be recalculated in real-time is deployed as internal experts and business leaders can generate and test alternative scenarios on the fly.

Step 6: Deliver the outputs that users need quickly

In  new product launch planning , agreements may have been reached with a number of suppliers to deliver rapid replenishment designed to prevent stock outs in the most uncertain period immediately after the launch. However, if reforecasting the exact replenishment needs of every distribution point in the supply chain involves multiple steps, much of that precious time will evaporate.

Building a fully integrated demand forecasting model that compares existing stock levels and automatically generates a detailed replenishment report for every location as soon as any high-level assumptions change precludes such delays and shortens the replenishment cycle.

Step 7: Combine different techniques

Bottom-up modelling based on purchasing intentions is not the only method available for demand forecasting for new products. In some markets, such as technology and consumer electronics, products can go through an entire life cycle in a matter of months. Such narrow windows of opportunity make it vitally important to assess demand as accurately as possible. The most damaging situation is having a stock shortage while the product is still hot, leading disappointed consumers to purchase a competitor’s product.

These sectors make use of sophisticated modelling techniques developed by academics that use substitution and diffusion rates to forecast how rapidly new technologies replace older ones. Such methodologies might not be appropriate to many businesses, but the message is the same: combining different forecasting techniques gives more accurate results.

Step 8: Reality check the forecast

Whenever reliable data exists, always check the forecast against the sales evolution of comparable products to see if it is realistic. Similarly, you should also estimate how your market share might evolve as new competitors came into this emerging category and how the total market might grow. Unless this macro-overview is credible, be prepared to rework the assumptions behind the model.

Step 9: Reforecast, reforecast, and reforecast some more

Diligently monitor sales and qualitative feedback such as product reviews, media mentions, and customer feedback, and agree with the members of the working group how the assumptions in the model might need to change. If it’s appropriate, reforecast daily.

Step 10: Be prepared to cut your losses

Finally, always have a contingency plan. A high proportion of new products fail, and it is better to pull the plug on an ailing new product that is unlikely to achieve a viable level of profitability at the earliest opportunity. So, quantify and agree what level of sales penetration constitutes failure well before the product launch. That way, the decision will be swift, and the existing stock can be quickly and cost-efficiently depleted.

Demand forecasting for new products is not an exact science and relies on judgement rather than statistical techniques. Key to success is collaboration, using all the quantitative and qualitative data that is available and having a modelling solution that can quickly and easily be updated to generate detailed forecasts for all users across the business. The benefits can be impressive both in terms of reduced inventory costs and improved customer satisfaction, something that is vital for a new product to flourish.

Watch our demo to see how Anaplan helps with demand forecasting by enabling advanced decision-making in every part of your business

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7 Financial Forecasting Methods to Predict Business Performance

• 21 Jun 2022

Much of accounting involves evaluating past performance. Financial results demonstrate business success to both shareholders and the public. Planning and preparing for the future, however, is just as important.

Shareholders must be reassured that a business has been, and will continue to be, successful. This requires financial forecasting.

Here's an overview of how to use pro forma statements to conduct financial forecasting, along with seven methods you can leverage to predict a business's future performance.

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What Is Financial Forecasting?

Financial forecasting is predicting a company’s financial future by examining historical performance data, such as revenue, cash flow, expenses, or sales. This involves guesswork and assumptions, as many unforeseen factors can influence business performance.

Financial forecasting is important because it informs business decision-making regarding hiring, budgeting, predicting revenue, and strategic planning . It also helps you maintain a forward-focused mindset.

Each financial forecast plays a major role in determining how much attention is given to individual expense items. For example, if you forecast high-level trends for general planning purposes, you can rely more on broad assumptions than specific details. However, if your forecast is concerned with a business’s future, such as a pending merger or acquisition, it's important to be thorough and detailed.

Forecasting with Pro Forma Statements

A common type of forecasting in financial accounting involves using pro forma statements . Pro forma statements focus on a business's future reports, which are highly dependent on assumptions made during preparation⁠, such as expected market conditions.

Because the term "pro forma" refers to projections or forecasts, pro forma statements apply to any financial document, including:

• Income statements
• Balance sheets
• Cash flow statements

These statements serve both internal and external purposes. Internally, you can use them for strategic planning. Identifying future revenues and expenses can greatly impact business decisions related to hiring and budgeting. Pro forma statements can also inform endeavors by creating multiple statements and interchanging variables to conduct side-by-side comparisons of potential outcomes.

Externally, pro forma statements can demonstrate the risk of investing in a business. While this is an effective form of forecasting, investors should know that pro forma statements don't typically comply with generally accepted accounting principles (GAAP) . This is because pro forma statements don't include one-time expenses—such as equipment purchases or company relocations—which allows for greater accuracy because those expenses don't reflect a company’s ongoing operations.

7 Financial Forecasting Methods

Pro forma statements are incredibly valuable when forecasting revenue, expenses, and sales. These findings are often further supported by one of seven financial forecasting methods that determine future income and growth rates.

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn to quantitative forecasts , or assumptions about the future based on historical data.

1. Percent of Sales

Internal pro forma statements are often created using percent of sales forecasting . This method calculates future metrics of financial line items as a percentage of sales. For example, the cost of goods sold is likely to increase proportionally with sales; therefore, it’s logical to apply the same growth rate estimate to each.

To forecast the percent of sales, examine the percentage of each account’s historical profits related to sales. To calculate this, divide each account by its sales, assuming the numbers will remain steady. For example, if the cost of goods sold has historically been 30 percent of sales, assume that trend will continue.

2. Straight Line

The straight-line method assumes a company's historical growth rate will remain constant. Forecasting future revenue involves multiplying a company’s previous year's revenue by its growth rate. For example, if the previous year's growth rate was 12 percent, straight-line forecasting assumes it'll continue to grow by 12 percent next year.

Although straight-line forecasting is an excellent starting point, it doesn't account for market fluctuations or supply chain issues.

3. Moving Average

Moving average involves taking the average—or weighted average—of previous periods⁠ to forecast the future. This method involves more closely examining a business’s high or low demands, so it’s often beneficial for short-term forecasting. For example, you can use it to forecast next month’s sales by averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it’s most commonly applied to future stock prices, it’s also used to estimate future revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy of moving average forecasts.

4. Simple Linear Regression

Simple linear regression forecasts metrics based on a relationship between two variables⁠: dependent and independent. The dependent variable represents the forecasted amount, while the independent variable is the factor that influences the dependent variable.

The equation for simple linear regression is:

Y ⁠ = Dependent variable⁠ (the forecasted number)

B = Regression line's slope

X = Independent variable

A = Y-intercept

5. Multiple Linear Regression

If two or more variables directly impact a company's performance, business leaders might turn to multiple linear regression . This allows for a more accurate forecast, as it accounts for several variables that ultimately influence performance.

To forecast using multiple linear regression, a linear relationship must exist between the dependent and independent variables. Additionally, the independent variables can’t be so closely correlated that it’s impossible to tell which impacts the dependent variable.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There are additional factors that influence performance and can't be quantified. Qualitative forecasting relies on experts’ knowledge and experience to predict performance rather than historical numerical data.

These forecasting methods are often called into question, as they're more subjective than quantitative methods. Yet, they can provide valuable insight into forecasts and account for factors that can’t be predicted using historical data.

6. Delphi Method

The Delphi method of forecasting involves consulting experts who analyze market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting forecasts of business performance based on their experience and knowledge. The facilitator then compiles their analyses and sends them to other experts for comments. The goal is to continue circulating them until a consensus is reached.

7. Market Research

Market research is essential for organizational planning. It helps business leaders obtain a holistic market view based on competition, fluctuating conditions, and consumer patterns. It’s also critical for startups when historical data isn’t available. New businesses can benefit from financial forecasting because it’s essential for recruiting investors and budgeting during the first few months of operation.

When conducting market research, begin with a hypothesis and determine what methods are needed. Sending out consumer surveys is an excellent way to better understand consumer behavior when you don’t have numerical data to inform decisions.

Improve Your Forecasting Skills

Financial forecasting is never a guarantee, but it’s critical for decision-making. Regardless of your business’s industry or stage, it’s important to maintain a forward-thinking mindset—learning from past patterns is an excellent way to plan for the future.

If you’re interested in further exploring financial forecasting and its role in business, consider taking an online course, such as Financial Accounting , to discover how to use it alongside other financial tools to shape your business.

Do you want to take your financial accounting skills to the next level? Consider enrolling in Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to learn how to use financial principles to inform business decisions. Not sure which course is right for you? Download our free flowchart .

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Product Strategy Guide with Real-World Examples + Template

Carlos González De Villaumbrosia

Updated: August 26, 2024 - 12 min read

Product Strategy is defining what you want to achieve with your product and how you plan to get there. 

Strategy is crucial in Product Management. It is the bridge connecting product development with business goals, ensuring that resources are focused on delivering value to the target market. Strategy guides decision-making throughout the product lifecycle, helping to prioritize features, target the right audience, and achieve a competitive advantage.

In this article, we’ll define Product Strategy and differentiate it from other related but distinct concepts like Product Vision and Product Roadmap. We’ll break down the key components of a strategy and provide a Product Strategy Framework that addresses all major aspects of a winning strategy, along with a free template and example from the real world. 

Product Strategy Template

The higher you go up on the Product career ladder, the more strategic skills matter. This template helps you define the why and how of product development and launch, allowing you to make better decisions for your users, team, and company.

What Is Product Strategy?

A product strategy outlines where your product is going, how it will get there, and why it will succeed. It is not a product roadmap, project plan, company vision, or mission. It's not a specific goal you want to reach, like a revenue goal. It’s something you should revisit frequently and adapt based on new knowledge, allowing for creativity, adaptability, and flexibility. 

“ We don't want to create every product that will be a modest success. We are looking for products that are going to bring a high magnitude of success. ”

— David Myszewski, VP of Product at Wealthfront, on The Product Podcast : From Launching the iPhone to 20x Growth

Imagine you decide to drive from Toronto, Ontario, to Los Angeles, California. 

📍LA is your destination, your Product Vision . 

🛣️ Your route is the Product Strategy . It’s how you will get from Toronto to LA—will it be a straight shot, or will you backtrack to see Niagara Falls and visit your Great Aunt in Phoenix? Will you sleep in roadside motels or in a pop-up camper? 

These types of decisions influence your route, just as the overall business objectives and company mission influence your Product Strategy.

🚸 The road signs along the way would be your OKRs (Objectives and Key Results)—they measure how far you’ve gone and how long you have to go (and whether you need to speed things up to make it to your next stop in time). 

🗺️ Your trusty roadmap would be the Product Roadmap (what else?). It’s a physical manifestation of the route, a document that you can reference to orient yourself along the way.

Product Strategy vs. Product Vision

Product Strategy outlines an actionable plan to achieve specific business goals, detailing how a product will meet market needs and outperform competitors and the approach for doing so. It's the "how" of product development. Product Vision , on the other hand, is the "why"—a long-term, aspirational view of what the product aims to achieve and its impact on users and the market. 

Strategy vs. OKRs

Product strategy is the high-level plan that outlines how a product will achieve its goals and meet market needs, focusing on direction and long-term objectives. OKRs (Objectives and Key Results) are a goal-setting framework used to measure progress toward those objectives. OKRs break the strategy down into specific, measurable goals (objectives) and the key results needed to track success. Strategy guides; OKRs quantify progress.

Product OKR Template

Use this Product OKR template to set and track your OKRs (Objectives and Key Results). Align your team’s daily tasks with product and company strategy!

Strategy vs. Prioritization

Strategy informs company-wide decisions on what products to build and how to position them, while prioritization is the process of determining the order in which features, tasks, or initiatives should be tackled based on factors like impact, resources, and urgency. While strategy sets the direction, prioritization ensures the most critical work is addressed first.

Feature Prioritization Template

Use this feature prioritization template to get clear direction on which features to include and which to leave out.

Product Strategy vs. Product Roadmap

Product strategy is the overarching plan that defines how a product will achieve its goals and succeed in the market. A Product Roadmap , however, is a tactical tool that visualizes the "what" and "when," laying out the specific features, timelines, and milestones needed to execute the strategy. The roadmap turns strategy into actionable steps.

Product Roadmap Template

Download our easy-to-use template to help you create your Product Roadmap.

5 Elements of a Product Strategy Framework + Template

A well-defined Product Strategy takes the following elements into consideration: 

Product Vision 

Before you can decide on your route, you need a destination. The Vision is the purpose behind your product and the future you imagine for your users. 

Strategies should be data-driven, based on accurately measured past results and reasonable projections for the future. They should include insights into competitors, market trends, pricing, and customers.

“ When I think about our product strategy, I don't just think about this as a feature somebody would love. I think about whether this is a feature somebody would need and pay for. ”

— Trisha Price, CPO at Pendo, on The Product Podcast , Trisha Price Reveals Pendo’s Game-Changing AI Product Features 

Customer data

What are you hearing from existing customers or users of competitor products? What are their pain points and aspirations? Your strategy should be based on what the user wants, needs, and (as Trisha Price said above) would pay for. 

Free User Persona Template

Get to know your users to build the right solution for the right audience.

Unique value proposition

Speaking of value, what does your product offer that no other product does? A strategy that takes on the pain points of your ideal customers has a good chance of success. Are there customers out there looking for a product you’re in a position to make? Or are you making something for the sake of making it, despite a poor product-market fit? 

If you’re unconvinced about the perils of making something nobody asked for, read up on New Coke . 

Free Value Proposition Canvas

Learn how to take user problems as the foundation of your solution and only build products that matter with our free Value Proposition Canvas!

Competitor landscape

What are your competitors doing that’s working? What are they doing that you could do better? These are all important insights that inform a well-conceived Product Strategy. Compare your current or future product and features to what else is out there to make sure you don’t build a Zune .

Product Comparison Template

Winning products get to the core of a user need—and then solve it better than the competition. Use this template to identify your user need and evaluate other players in the market.

Effective pricing can be the difference between success and failure. Raising the prices of an existing product can make Wall Street smile or cause users to revolt.  It’s a delicate balance that takes into consideration what you know about users, competitors, and the market overall. 

It’s best to go feature by feature, compare pricing to competitors, and assign prices based on the value proposition.

Product Feature Analysis Template

Understand how your Product’s features stack up to the competition. Identify core features needed to compete against industry-standard products. Then go above and beyond!

Challenges 

Any roadblocks you anticipate blocking the product development you’ve planned out. These can be technical, legal, or market-based.

Will you disrupt the market with a cheaper alternative that cuts out the middleman? Or will your product differentiate itself from the rest with patented, never-before-seen technology? 

Maybe the answer is both! Your approach can be single or multi-pronged, but the important thing is that it is clear, achievable, and communicated to everyone. 

See examples of Product Strategy approaches below.

Accountability

What are your desired outcomes? How do you define success? 

We all know that we’ll need to measure our progress along the way to our ultimate goal, or Product Vision. The thing is, there are a ton of product-related metrics out there. You can’t give them all the same importance—that would be the same as not paying attention to any. 

Instead, the metrics you hone in on—your Key Results—should align with your approach and overall strategy. 

In Product School’s Product Strategy Template , you’ll be guided through all of these aspects of Product Strategy step by step to ensure you cover all your bases. 

Product Strategy Framework Example - Zoom

Let’s see the strategy framework above as applied to the notoriously disruptive company Zoom.

Product Strategy Approaches + Examples

There are many different approaches used by companies to make sure products cut through noise. Here are some examples: 

Product-led Growth

Description: Product-led growth (PLG) is a strategy where the product itself drives user acquisition, expansion, conversion, and retention. The product is designed to deliver immediate value, encouraging users to engage deeply and share it organically.

PLG works best in situations where the product can provide immediate value without the need for heavy sales or marketing efforts, typically in software as a service (SaaS) or digital products.

Example: As shown above, Zoom is an example of a PLG (Product-led Growth) company . Zoom leverages PLG by offering a free version of its video conferencing software, which users can easily adopt and start using without any friction. 

Product-led Sales

Product-led sales combines the elements of product-led growth with traditional sales techniques. It uses data-driven insights from the product usage to identify high-potential customers, guiding sales teams to target users who are already engaged.

Ideal for B2B companies where large deals are necessary and sales cycles are long, but product usage data can reveal the best opportunities for targeted sales efforts.

Example: Atlassian uses product-led sales by tracking how users engage with its tools like Jira and Confluence. This data helps identify which teams or companies are ready for an enterprise-level solution, allowing the sales team to focus their efforts on converting these high-potential customers.

Focus/Niche Strategy

This strategy involves targeting a specific segment of the market, offering specialized products or services tailored to the needs of that niche. It’s most effective when there’s a clearly defined market segment with unique needs that are underserved by competitors.

Example: GoPro focuses on the niche market of extreme sports enthusiasts and adventure travelers, providing specialized cameras that cater specifically to their needs. Not everyone will need or want a GoPro, but those who do are fanatical about them.

Quality/Luxury Strategy

This strategy emphasizes the superior quality, exclusivity, and high price points of products, appealing to customers who are willing to pay more for premium offerings. It works best in markets where consumers are willing to pay a premium for high quality, status, or unique craftsmanship, typically in fashion, automobiles, or high-end consumer goods.  

Example: Rolex utilizes this strategy by maintaining its reputation as a luxury watchmaker, where its products are synonymous with prestige and high quality.

Cost Leadership

Companies pursuing this strategy aim to produce goods or services at a lower cost than their competitors while maintaining acceptable quality. It works best in industries where price competition is intense, and consumers are highly price-sensitive. It is particularly effective when a company can achieve significant economies of scale, leverage cost-efficient production methods, or access cheaper raw materials. 

Example: AmazonBasics Batteries are a great example of a product that utilizes a cost-based strategy. Amazon offers these batteries at a lower price point than well-known brands like Duracell or Energizer. By leveraging their efficient supply chain, large-scale distribution, and minimal marketing costs, AmazonBasics can produce and sell batteries at a lower cost to attract cost-conscious consumers who prioritize affordability over brand loyalty.

​​Differentiation

Differentiation involves making a product stand out from the competition through unique features, design, branding, or customer experience. This is the best strategy for highly competitive markets where customers have many choices, and a unique selling proposition is crucial to stand out.

Example: Apple employs differentiation through its sleek design, never-before-seen features, user-friendly interfaces, and seamless ecosystem, setting its products apart from other technology brands.

Product Marketing Strategy

Product Marketing Managers (PMMs) bridge the gap between strategy and marketing through targeted marketing efforts. The product vision guides the overall direction and messaging, while the chosen strategy model—such as product-led growth or differentiation— shapes the marketing approach, dictating whether to focus on user acquisition through the product experience or highlight unique features.

PMMs ensure that campaigns resonate with the target audience and communicate the product's value proposition effectively. They translate the strategic framework into actionable marketing tactics, like the 4 Ps, which remind marketers to focus on:

At companies where there isn’t a specific PMM role, Product Managers align with marketing teams to monitor market feedback and performance metrics, so that product managers can refine the strategy, making adjustments to the marketing efforts to maximize the product’s impact and success in the market.

Why Is Product Strategy Important?

Successful products don’t happen by accident; a product strategy is your greatest tool to effectively solve real user needs while meeting business goals. 

Here are some of key reasons why having a product strategy is important:  

Focus : When you make a product for everyone, you’re making a product for no one. Product strategy helps companies focus their efforts on developing and marketing products that meet the needs of the target market.

Resource allocation : Developing a product strategy enables companies to identify key priorities, define timelines, and budget resources effectively.

Competitive advantage : Do your product strategy research to identify unique value propositions and stand out in the market.

Alignment : Product strategy helps ensure that everyone within the company is aligned on the product's objectives, target audience, and key features. This alignment is essential for effective collaboration and communication across different teams, such as product development, marketing, and sales. 

Customer satisfaction : A customer-centric product strategy ensures that products are developed with the customer in mind, leading to greater customer satisfaction and retention. 

Product Strategy in Product Management: The Key to a Smooth Ride

In conclusion, a well-defined product strategy is like a carefully planned route on a road trip—it guides the product's journey from its starting point to its ultimate destination. Just as a clear route helps you navigate from Ontario to California, a strong product strategy connects the product vision with actionable plans, ensuring all efforts are aligned with business goals and market needs. 

There will still be bumps along the way—that’s unavoidable. However, a coherent and well-communicated strategy allows companies to allocate resources effectively and build great things that improve people’s lives. The ultimate destination.

Enroll in Product School's Product Strategy Micro-Certification (PSC)™️

The difference between a good and a great product lies in your Product Strategy, answering vital questions like: Who's the product for? What benefits does it offer? How does it further company objectives?

Updated: August 26, 2024

A product strategy outlines the plan for achieving a product's goals, detailing how it will meet market needs, compete effectively, and address user pain points.

A product strategy is structured by considering five key elements: Product Vision, Insights, Challenges, Approach, and Accountability. These components help define the direction, differentiate the product, and align with market needs. A great first step is to download a template, like the free one from Product School, to help you cover every aspect of the strategy. 

A product strategy is measured using Objectives and Key Results (OKRs) that track progress toward strategic goals. OKRs keep everyone accountable and help Product teams assess the effectiveness of the overall strategy.

Common product strategy approaches include Product-Led Growth, Differentiation, Cost Leadership, Niche Strategy, and Quality Strategy. More important than the type of strategy adopted is that it is tailored to specific market conditions and business objectives.

Enjoyed the article? You might like this too

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The Forecast and the Plan: What’s the Difference?

Plex DemandCaster

Imagine a new professional, walking into her first Sales and Operations Planning Meeting at the multinational corporation who hired her only a few weeks earlier. This is a big moment for the new employee.

The meeting might be awash with numbers, spreadsheets, graphs, and interactions between people that she doesn’t yet understand completely. Managers might talk a language that is rather unfamiliar. She understandably may feel somewhat overwhelmed.

The language of Supply Chain Management is important. Practitioners need to take special care to define terminology clearly, to avoid misunderstandings. As a relatively new business concept, SCM strives to promote a common lexicon that is universally recognized and accepted.

Frequently, for example, business people use the terms “forecast” and “plan” as if they are synonymous. But these two words carry very different meanings and the implications of confusing the two can be significant.

A forecast is a prediction of future events, using a means other than simply making a blind guess.

A plan, on the other hand, is an articulation of how a company intends to respond to a demand forecast. Ultimately, the plan integrates many other factors in addition to the forecast in order to set operational direction for the business.

There are many types of forecasts that are used in business. Companies assemble technological forecasts, economic forecasts, and demand forecasts. It is the demand forecast that is of greatest interest to an operations manager, and supporting the fulfillment of future demand is of critical importance to supply chain professionals. We use demand forecasts to help us plan capacity, human resources, and logistics strategies.

We understand that, because of the myriad variables at play, forecasts are rarely 100% accurate. In spite of the shortcomings, forecasting is an essential part of planning for the future. By taking the time to operationalize the forecast and develop a plan, we are forced to think through potential positive or negative scenarios. Over time, careful forecasting will lead to more efficient and realistic planning.

In contrast to forecasting, planning is the process whereby a business considers all strengths, weaknesses, opportunities, and threats, and provides direction to the company in its entirety. The plan metabolizes not only the forecast, but it also balances demand with the company’s ability to fulfill demand. These two sides of the scale are sometimes referred to as “priority” (demand) and capacity (supply). Further, the plan can articulate methods by which a business will try to influence the forecast, perhaps by increasing demand or shifting the timing of demand through marketing.

Companies that use a formalized Manufacturing Planning and Control (MPC) architecture will direct different levels of forecasts toward different levels within the planning hierarchy.

Highly aggregated forecasts of future demand and economic conditions will be directed toward the Strategic Planning activities near the top of the MPC hierarchy. Somewhat disaggregated forecasts at product category of  family levels will be of greatest interest to the Sales and Operations Planning functions that are undertaken by mid-level management. Very detailed item-level forecasts for finished goods will be used most commonly in the Master Production Scheduling (MPS) and Control activities. It is important that the SCM professional use forecasting techniques and approaches that match the intended use of the forecast.

Taking the demand forecast into consideration and combining it with other forces that come to bear on the company such as the labor market, economies of scale, and the potential for realizing manufacturing efficiencies, business leaders might choose between a level, chase or hybrid production strategy. Depending upon the production strategy used, the forecast and the operational plan can be at significant variance from each other, and this will be by design.

Operations managers are responsible to achieve planned production levels, and through this key performance metric, operations will support fulfillment of demand and will support marketing sales strategies. Financial plans will flow from the construction of sales and operational plans, resulting in the calculation of cash flow, inventory, and profitability projections.

Sales and Operations Planning ( S&OP ) activities provide a key link between the market (external to the business) and internal manufacturing processes. S&OP drives the Master Production Schedule (MPS), which is the time-phased statement of what quantities of finished goods are required, and precisely when those quantities are required. Manufacturing is held responsible to complete the MPS. This activity is frequently called “hitting the schedule.”

It is not unusual that, as the year progresses, new demand forecast information comes to light that puts sales potential at wider variance from the production plan than was originally foreseen. It is through a disciplined monthly S&OP process that such differences become reconciled. Appropriate adjustments to the plan are made in response.

 In summary, we have seen that the operations plan is not a forecast of demand. Rather, the demand forecast becomes metabolized in the business through Sales and Operations Planning. S&OP takes into consideration not only the demand forecast, but also constraints faced by the business, technological realities, marketing initiatives, and financial targets. Output from the S&OP process becomes a key input to the Master Production Schedule, achievement of which is a key focus of the manufacturing team. Production strategy works to decouple the forecast from the production plan, even as manufacturing execution supports the sales plan.

Contact us if you would like to learn how DemandCaster can help you reap the benefits of effective S&OP planning.

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Home » What is Forecasting in Manufacturing Best Practices? (+Free model)

What is Forecasting in Manufacturing Best Practices? (+Free model)

In addition to an annual SWOT analysis , forecasting is one of the most important planning activities for most manufacturers. 

After all, forecasting affects how you price your products and services and how you make sales . Similar to creating an optimization model, where it's a “nice and neat little world” where you assume you know everything and create a model to determine what you should do next, forecasting is far more realistic and much more complex . 

Forecasting is very valuable and very hard to do.

What is forecasting in manufacturing? Forecasting in manufacturing is one of the most important manufacturer’s planning activities. The purpose of forecasting is to make better business decisions as it relates to topics such as, inventory management, production planning, purchasing, workforce scheduling, resource allocations and capital budgeting.

Fortunately, manufacturing forecasting experts and researchers have developed many quantitative forecasting best practices and procedures. Many of those are listed below.

These procedures range in their complexity levels, required expertise, and ease of use. Demand forecasting is elemental , especially with the rapid growth in the manufacturing industry.

However, before understanding some of the best forecasting practices in the manufacturing industry, a clear definition of forecasting is important. 

Read below to understand forecasting in manufacturing, including some manufacturing forecasting best practices and how to forecast in manufacturing.

Forecasting in Manufacturing Definition

Forecasting is the estimation of a future occurrence. It is the art and science of knowing what you need before needing it. 

Forecasting in manufacturing is estimating a variable in the future. The primary goal is to anticipate events of the future.

A manufacturing forecast serves as an input to multiple business decisions, including inventory management, production planning, purchasing, workforce scheduling, resource allocations, capital budgeting, etc. -- Nada R. Sanders, Department of Management Science & Information Systems at Wright State University in Dayton, Ohio

For manufacturer’s, the forecast is a document that plans and manages inventory. 

Manufacturers use the forecast to order products or raw materials from the supplier(s) to be ultimately delivered to the customer. 

For example, the manufacturer's customer service representative may review a client's historical sales data and project future sales in order to figure how much product is required to be in stock, how much product should be in the warehouse, and the quantity of a product that should be in production.

Forecasting in manufacturing isn't simply a prediction but a channel to influence the future of the business. After all, forecasting in manufacturing affects: 

• Raw materials 
• Work in progress
• Finished goods

And of course this affects scheduling, sales planning, support staff, utilities, warehousing, on and on.

It also affects the sales and marketing department who needs to know when to ramp up customer communications, product promotions, event planning, and the overall Marketing Mix .

But it is possible to construct a plan with the least possible variability.

Manufacturing business managers usually forecast inventory and supply quantities to meet demand at all times, despite forecasting stock levels usually being a bit of a problem even for veteran managers.  

Forecasting then assumes that previous trends in the business will proceed with minimal variance in the future. This presents problem #1.

Another problem is that manufacturing trends tend to vary seasonally . However, shifting manufacturing trends must also remain consistent for forecasting to be effective . Manufacturers can strategize and implement forecasting best practices to make the best possible decisions.

Manufacturing Forecasting Example #1 for Better Inventory Management: Hard wood flooring manufacturing

How do you know the optimal amount of inventory to buy.

Here's one forecasting model to help identify how much inventory to purchase, a very important forecasting method for manufacturers.

This is a real forecasting model built for a hard wood flooring manufacturer who wanted better systems for forecasting their inventory management. This forecasting model helped them make better decisions on how much inventory to purchase each time they ordered from their supplier.

The optimal amount of inventory to purchase is called the ‘economic order quantity’ (EOQ) .

EOQ is built on three main factors:

• The holding cost to keep inventory on the shelves,
• The cost to order the inventory, and
• The quantity demanded by the customers.

The purpose of this forecasting model is to create the optimal amount of inventory that the company should order at one time, which is why it is called the Economic Order Quantity (EOQ).

After updating the annual unit demand (top yellow cell) and the purchase price per unit (lower yellow cell), and tied the values to an algebraic formula, you can use Solver in Excel or Solver in Google Sheets to run thousands of calculations to find the optimal value.  Here is an example of what this manufacturing forecasting model looks like.

This model told us that the most optimal quantity of units to order is 1,127 units.

This optimized number is based on:

• The purchase price of the product,
• The amount ordered by customers (demand),
• The cost of holding it in the warehouse, and
• The cost to order (usually staff time and admin costs). 

With the EOQ, this construction manufacturer now knows what their optimal inventory purchase is – leading to a better purchase decision and better allocation of valuable resources.

Manufacturing Forecasting Example #2 for Better Inventory Management: Supplement manufacturing

Here's another real example of an EOQ model for a supplement manufacturing company.

Knowing how much inventory to purchase is a very common problem, especially in the supplement industry.

For one, if they tie up too much cash and hold too many units at one time, these resources could be getting a better return in other places. And, supplements usually have "use by date", which means inventory needs to be optimally purchased and sold. If the inventory isn't sold in time, then it goes to waste.

Second, if they do not purchase enough inventory and sell out before the next batch is completed, this bring many potential problems. Losing the customer is the most crucial, and as we know, no marketer on the planet wants to lose a good customer.

So, here's what we know:

• The cost of holding the product in the warehouse is approximated at 5% of the cost of the cost of the product (talk to your accounting team for this number).
• The cost for someone to actually acquire what they need to make the product order is $50.
• The annual demand in units is 100,000. This means the company sells 100,000 units of this product per year.
• The purchase price per unit is $4.15.
• The holding cost per unit is $0.21.

After running Solver in excel with the goal to find the most optimal economic order quantity to place per order , this company found that the ideal quantity to order at one time is: 6,942 units.

This means the order value is $28,809 and the company should order 14 times per year.

Here's what this model looks like:

You can access this EOQ manufacturing forecasting model as a Google Sheets document here. Be sure to save it as your own:

Free manufacturing forecasting model to help you optimize your inventory planning.

Here is what this document looks like, with a screenshot of Solver in action (If you have never used Solver, it is worth going to Microsoft for a summary ):

Manufacturing Forecasting Best Practices (List of 4)

First, know that in forecasting you need data.

The purpose of this historical data is to give you confidence in forecasting future data.

Please read that again.

You don’t really care about what happened 10 months ago, let alone 2 years ago -- which, by the way, is a solid amount of historical data to always have on hand for forecasting purposes.  

You only care about what you need to do in the next 30 days and beyond, or whatever time period you are forecasting.

The method you use to create this forecast is really dependent upon your past data.

For example, if for the past 2 years, you have sold 2,000 units per month of your widget, it is safe to forecast your next manufacturing run. 

But if your CEO tells the sales and marketing team to 2x our promotions, this is where your forecasting skills need to shine. How much should you increase product production? This is also where your marketing team needs to scour conversion rate data in order to make some projections to the operations team.

In our tutorial on What are the benefits of sales forecasting? (+free forecasting model)   we describe the two basic families of forecasting methods, 1) quantitative and 2) qualitative, and we provide some methods for each group. If you are forecasting a product or service with no sales, we provide you a free model that you can use.

As you build your preferred forecasting method, below are some best practices for accurate and reliable forecasting:

1. Allow Rolling Forecasts

Experts say the average preparation time for an annual budget is 3-6 months! 

While the average time for forecasting may take 1-4 weeks!

Either way, this is a long time to get important data that is the engine of a manufacturing company. 

A “rolling view” of the organization (real-time) combined with strategic analysis is the literal cure. You’ll need to figure out how to develop and implement a method allowing you to compile and view the most important information on an automated basis. While it will take some time to develop, or to locate some forecasting software that may work for you, similar to your marketing Key Performance Indicators (KPI’s) , you can adjust your forecasting model drivers to provide a constantly rolling forecast.

2. Ensure Everyone is on the Same Page

Is everyone at the company aligned on the numbers? 

If you are like most companies, the answer is “no”.

A solid forecasting plan needs everyone to be on the same page and ensures that everyone can access the latest data .

Unfortunately, oftentimes data spews in from isolated spreadsheets and streaming in from different sources such as personal inventory, production, and expense reports, as well as Enterprise Resource Planning and even alternative operational systems. The result is decisions that are delayed, based on stale data or even lacking important components.

The best practice is to avoid unreliable spreadsheets and implement a specialized tool that incorporates the latest data from all sectors to drive your inventory models or standard costs. Developing a single source of reliable data in a manufacturing organization keeps people on the same page.

3. Develop Several "What-If" Scenarios Concurrently

Modern businesses require agility.  Finance teams require flexibility to effortlessly spin-off several what-if scenarios at any unscheduled time. This plan explores the implications of possible strategic decisions and helps decide effectively.

Such complex planning can be swift and easy with the proper platform. It can also be much more effective than conventional spreadsheet-based planning. The right platform should allow you to change assumptions easily and notice results quickly. You can analyze the implications as long as desirable.

But don’t be intimidated by this. You can keep it simple. Start with 3 sample “What if” scenarios: Plan A, Plan B and Plan C. Plan A is your “Best case scenario that you are planning for”, Plan B is your “This could happen scenario” and Plan C is your “This could happen but we would rather it not be this poor” scenario. 

4. Continually Measure Forecast Accuracy At All Levels

Demand planning and forecasting can be inaccurate and nuanced. 

As a result, each forecast you produce can benefit from fine-tuning. Your manufacturing organization should regularly evaluate its forecasts for accountability and improvement, mostly during the sales and operations planning review process. 

Collecting valuable insights from stakeholders during this process can enrich your baseline forecasts.

You can also track the forecast value-added metric to evaluate components of the forecast process. This way, you can identify what is of value and what you can eliminate.

How Do You Forecast in Manufacturing?

Choosing the right forecasting technique in manufacturing isn't always easy. Forecasting in manufacturing combines past experience, general skill, and a relatively sufficient dose of financial judgment. Depending on your manufacturing operation's size, statistical tools and techniques are also valuable for creating more accurate forecasts.

Forecasting is a mix of past experience judgments with a mix of present and past data —  inventory, sales, production, personnel, equipment, facilities, schedule, etc. — to make informed business decisions. 

The bottom line is that the goal of forecasting is to predict the future using historical data points. 

The six steps in business forecasting are:

• Identify the challenge . While this may seem like a relatively simple step at first—even if you have the best forecasting tool—it can be tricky, since there are limited tools to assist with this step. Evaluate any issues with those responsible for maintaining databases and collecting the data.
• Gather information . Information, in this case, is actual data and the knowledge gathered by experts.
• Perform a preliminary analysis . This way, you can tell if the data is usable or not. The early analysis also reveals helpful trends/patterns. Also, check for redundant data, then eliminate the unnecessary bit or develop educated assumptions.
• Choose a forecasting method . There is no one-size-fits-all approach, since the effectiveness of the chosen model depends on the availability and nature of available data. Forecasting techniques are divided into qualitative forecasting and quantitative forecasting.
• Conduct data analysis.
• Verify the chosen model's performance .
• Regularly repeat and fine-tune the process.

Do you want to forecast your manufacturing business? Speak to an expert on the matter regardless of the side of your operation and get professional advice or help.

• Sanders, N. R. (1997). The status of forecasting in manufacturing firms . Production and Inventory Management Journal , 38 (2), 32.
• https://www.researchgate.net/publication/353000544_Regional_Manufacturing_Industry_Demand_Forecasting_A_Deep_Learning_Approach
• https://www.jstor.org/stable/2097588
• https://www.venasolutions.com/blog/budgeting-forecasting/guide-budgeting-forecasting

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Understanding Demand Forecasting: What Is It and How Does It Work?

• Christen Thomas
• August 26, 2024

Demand forecasting is an essential aspect of business planning and strategy. It involves estimating future demand for products or services based on historical data, market trends, and other relevant factors. By accurately predicting demand , businesses can make informed decisions about inventory management , production planning , and financial budgeting. In this article, we will explore the concept of demand forecasting , its key components, the process involved, different types of demand forecasting, and its impact on various aspects of business operations.

Defining Demand Forecasting

Demand forecasting refers to the process of estimating the quantity of a product or service that customers will purchase within a specific timeframe. It helps businesses anticipate market demand, plan their production levels, and allocate resources accordingly. Demand forecasting involves analyzing past sales data, market trends, customer behavior, and external factors such as economic conditions and competitor activities.

One crucial aspect of demand forecasting is the ability to adapt to changing market conditions and consumer preferences. Businesses must continuously monitor and adjust their forecasting methods to stay ahead of evolving trends and customer demands. This agility in forecasting allows companies to remain competitive and responsive in dynamic market environments.

The Role of Demand Forecasting in Business

Demand forecasting plays a crucial role in business operations. It provides valuable insights that guide decision-making across various departments and functions. By accurately predicting demand, businesses can optimize their supply chain management, reduce stockouts and excess inventory, minimize costs, and enhance customer satisfaction.

Furthermore, demand forecasting is not only limited to predicting customer demand for existing products but also extends to forecasting demand for new products or services. This forward-looking approach enables businesses to launch innovative offerings that resonate with consumer needs and preferences, driving growth and market expansion.

Key Components of Demand Forecasting

Demand forecasting comprises several key components that contribute to its accuracy and effectiveness. These components include historical sales data, market research, statistical models, and expert judgment. By combining these components, businesses can develop reliable and robust demand forecasting models.

Moreover, advancements in technology, such as artificial intelligence and machine learning, have revolutionized demand forecasting by enabling more sophisticated data analysis and predictive capabilities. By leveraging these technological tools, businesses can enhance the accuracy of their forecasts and gain a competitive edge in the market.

The Process of Demand Forecasting

The process of demand forecasting involves several steps that enable businesses to make well-informed predictions about future demand. These steps include data collection and analysis, predictive modeling techniques, and continuous monitoring and adjustment.

Effective demand forecasting is crucial for businesses to optimize their inventory levels, production schedules , and overall operational efficiency. By accurately predicting future demand, companies can avoid stockouts, reduce excess inventory costs, and improve customer satisfaction.

Data Collection and Analysis

Data collection is the first step in demand forecasting. Businesses gather historical sales data, customer feedback, market research, and other relevant information. Analyzing this data helps identify patterns, trends, and seasonality that can influence future demand.

In addition to internal data sources, businesses also leverage external data such as economic indicators, industry reports, and competitor analysis to enhance the accuracy of their demand forecasts. By incorporating a wide range of data sources, companies can gain a comprehensive understanding of market dynamics and consumer behavior.

Predictive Modeling Techniques

Predictive modeling techniques are used to develop mathematical models that forecast demand based on historical data and other variables. These techniques include time-series analysis, regression analysis, and machine learning algorithms. By applying these techniques, businesses can predict demand with a high degree of accuracy.

Advanced forecasting methods, such as predictive analytics and artificial intelligence, are increasingly being adopted by businesses to improve the precision of their demand forecasts. These cutting-edge technologies enable companies to analyze vast amounts of data in real-time and generate more nuanced predictions, leading to better decision-making and strategic planning.

Continuous Monitoring and Adjustment

Demand forecasting is an ongoing process that requires continuous monitoring and adjustment. As new data becomes available, businesses need to update their forecasting models and make necessary adjustments to ensure accuracy. By continuously monitoring demand and making timely adjustments, businesses can effectively manage their operations and respond to changing market dynamics.

Furthermore, collaboration between different departments within an organization, such as sales, marketing, and supply chain management, is essential for successful demand forecasting. By aligning cross-functional teams and sharing insights and data, businesses can enhance the accuracy of their forecasts and make more informed decisions to meet customer demand efficiently.

Types of Demand Forecasting

There are different types of demand forecasting methods that businesses can employ based on the time horizon and level of detail required. These methods include short-term demand forecasting, long-term demand forecasting, and passive and active demand forecasting.

Forecasting demand is a crucial aspect of business planning as it helps organizations anticipate market trends, manage inventory effectively, and make informed decisions about production and capacity. By utilizing various demand forecasting methods, businesses can minimize risks, optimize resources, and stay competitive in dynamic markets.

Short-term Demand Forecasting

Short-term demand forecasting focuses on estimating demand for a relatively short timeframe, usually up to one year. It is typically used for operational planning, inventory management, and production scheduling. Short-term forecasting techniques include moving averages, exponential smoothing, and regression analysis.

Moving averages involve calculating the average demand over a specific period, smoothing out fluctuations to identify underlying trends. Exponential smoothing assigns exponentially decreasing weights to past observations, giving more importance to recent data. Regression analysis examines the relationship between demand and various influencing factors to make predictions.

Long-term Demand Forecasting

Long-term demand forecasting involves estimating demand for an extended period, usually beyond one year. It is used for strategic planning, capacity expansion, and investment decision-making. Long-term forecasting techniques include trend analysis, market research, and scenario planning.

Trend analysis looks at historical demand patterns to identify long-term trends and make projections based on growth rates or seasonality. Market research involves gathering data on consumer preferences, economic indicators, and industry trends to forecast demand accurately. Scenario planning creates multiple scenarios based on different assumptions to prepare for various future outcomes.

Passive and Active Demand Forecasting

Passive demand forecasting relies on historical data and assumes that future demand will follow past patterns. It is useful when historical data is reliable and stable. Active demand forecasting incorporates external factors such as market trends, competitor activities, and economic conditions. It involves a combination of quantitative analysis and expert judgment to predict demand accurately.

Active demand forecasting requires continuous monitoring of market dynamics, competitor strategies, and macroeconomic factors to adjust forecasts accordingly. By integrating both passive and active approaches, businesses can enhance the accuracy of their demand forecasts and adapt to changing market conditions effectively.

The Impact of Demand Forecasting on Business Operations

Demand forecasting has a significant impact on various aspects of business operations, including inventory management, production planning, financial planning, and strategic decision-making.

Inventory Management and Production Planning

Accurate demand forecasting helps businesses optimize their inventory levels, reducing the risk of stockouts or excess inventory. By understanding customer demand patterns, businesses can plan their production schedules, allocate resources efficiently, and minimize wastage.

For example, let’s consider a retail clothing store. By analyzing historical sales data and using demand forecasting techniques, the store can anticipate the demand for different types of clothing items during different seasons. This allows them to stock up on popular items and adjust their production plans accordingly. As a result, they can avoid situations where they run out of stock during peak demand periods, ensuring customer satisfaction and maximizing sales.

Financial Planning and Budgeting

Demand forecasting plays a crucial role in financial planning and budgeting. By estimating future sales volumes, businesses can project their revenues, costs, and profitability. This information helps in setting realistic financial targets, allocating resources effectively, and making informed investment decisions.

Consider a manufacturing company that produces electronic devices. By accurately forecasting the demand for their products, they can determine the required production capacity and plan their budget accordingly. This allows them to allocate funds for purchasing raw materials, hiring additional staff, and investing in new technologies. By aligning their financial plans with demand forecasts, they can optimize their resource allocation and ensure a healthy bottom line.

Strategic Business Decisions

Demand forecasting is instrumental in guiding strategic business decisions. By accurately predicting demand, businesses can identify market opportunities, assess the feasibility of new product launches, and plan their market entry strategies. It enables businesses to align their operations and resources with changing market dynamics, ensuring long-term competitiveness.

Let’s take the example of a software development company. Through demand forecasting, they can identify emerging trends and customer preferences in the technology industry. This allows them to make strategic decisions on which software products to develop, invest in research and development, and allocate resources to stay ahead of the competition. By leveraging demand forecasting insights, they can position themselves as industry leaders and capture a larger market share.

In conclusion, demand forecasting is a vital tool that enables businesses to anticipate market demand, plan their operations, and make informed decisions. By understanding the key components and process of demand forecasting, businesses can develop accurate forecasting models that contribute to their overall success. Furthermore, different types of demand forecasting methods cater to various time horizons and level of detail required. The impact of demand forecasting extends to inventory management, production planning, financial planning, and strategic decision-making. By harnessing the power of demand forecasting, businesses can gain a competitive edge in the dynamic marketplace.

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Understanding the Core Objectives of Forecasting in Business Strategy

• August 30, 2024

In today's dynamic business environment, it is essential for organisations to make the right predictions for future trends to stay viable and succeed. The objectives of forecasting in business depend on how you are developing an informed evaluation of future events and situations. With business forecasting, you can make accurate predictions for future trends by examining current and historical data. Basically, forecasting is a type of tool that aids companies in making well-informed business decisions about their forthcoming. So, let’s understand the core objectives of forecasting in business.

What is Business Forecasting?

Business forecasting contains the tools and techniques that are used in predicting the developments in business, such as expenses, sales, profits and losses. The main objective of forecasting in business is to establish improved strategies on the basis of these informed future predictions, helping to remove possible losses before they occur. Through quantitative or qualitative models, historical data is collected and examined to identify the problems. 

Types of Forecasting in Business

Generally, there are two types of models that are used for forecasting in business, which include:

• Quantitative Models: Quantitative is a long-term method of forecasting in business that is examined with assessable data such as statistics and historical data. Previous performance is used to detect trends or rates of change. Through this approach, organisations can predict if variables like sales, housing values and gross domestic product, will be for a long period. Quantitative models include:
• Econometric Modelling: This is a mathematical model that uses multiple regression equations to test the internal consistency of datasets over time and the importance of the relationship between datasets. This is useful for predicting economic shifts and the possible impact of those shifts on the organisation. Basically, these models are used in sectors, including financial forecasting, pricing strategies and market analysis.
• Indicator Approach: This approach observes the relationship between certain indicators and makes use of the leading indicator data to evaluate the performance of the lagging indicators. Lagging indicators assess business performance eventually and provide the understanding of business strategies impact on the acquired results.
• Trend Analysis Method: It is one of the most common methods that uses historical data to predict future trends. Also known as ‘Time Series Analysis’, this forecast method helps organisations get significant views of the future by tracking past data. Also, this is the most affordable method.
• Qualitative Models: Qualitative is a short-term method of forecasting that depends on industry experts. This method is particularly valuable in forecasting markets for which past data is limited to make statistically appropriate decisions. Qualitative models include:
• Market Research: With a large number of people, polls and surveys are organised about a specific product or service to predict whether the amount of the consumption will less or rise.
• Delphi Model: Polling is done by asking a panel of experts for their opinions on specific topics. Their estimations are collected anonymously and made a forecast.

Importance of Forecasting in Business

Forecasting is essential in businesses because it provides the capacity to make well-informed decisions and develop business strategies. Financial and operational forecasting depends on present market situations and estimations of future trends. Historical data is collected and examined to discover patterns that are useful in the prediction of future events and changes.

The core objectives of forecasting in business include - helping forecasters to not only create prediction reports effortlessly, but also understand the predictions better and how to make informed decisions based on these predictions. 

Here are some reasons why forecasting is important in business:

• It enables businesses to set goals and make strategic plans for the future.
• It is essential in financial planning that helps organisations evaluate revenues, expenses and profits for the future.
• It aids organisations in detecting issues, possible risks and doubts, and makes risk management strategies to minimise them.
• It provides forecasters with beneficial insights and data, which can help them make well-informed decisions.

What is Financial Forecasting?

Financial forecasting helps organisations estimate their financial health for the future by tracking historical data. Additionally, the process should study the main market conditions and past financial trends. The main objectives of financial forecasting include the understanding of future economic performance, enabling organisations to make informed decisions and create strategic plans. 

By examining historical financial data, market trends, and other related factors, financial professionals can create forecasts for crucial financial metrics, such as expenses, revenue, profits and balance sheet items.

For those interested in transforming their career in this field, a financial analyst course can provide a complete industry-approved syllabus, exclusive real-world projects and practical training. 

Forecasting in business is an essential tool that helps make informed decisions about the future of the company. The core objectives of forecasting are to predict the future which can help businesses assign resources and determine the investment allocation, staffing, budgeting, marketing and more. Without forecasting, a business may not be able to regulate itself to the right path of success.

If you are looking to transform your career in the financial sector, then enrol in the Financial Analysis Prodegree in collaboration With KPMG offered by Imarticus Learning. This 4-month long program helps build a career in investment banking and corporate finance. 

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What is demand forecasting?

Why demand forecasting?

Lead times and service levels, how does demand forecasting work, types of demand forecasting, demand forecasting for your business.

Accurate and effective demand forecasting is a game-changer for your business. Its primary purpose is to ensure that companies meet expected customer demand, but it can be used for so much more. Planning for demand will help allocate resources, measure a business’s strength, and plan strategies to exploit opportunities and gain market share.

Demand forecasting helps to understand and predict demand, maintain the right amount of supply to meet that demand, and to manage product lifecycle within an industry.

Demand Forecasting is the process that enables demand planners and supply chain professionals to estimate customer demand for a product based on prior sales data and other contributing data factors. Creating a demand forecast helps companies better understand, predict, and plan their products and make better business decisions. The demand plan is used to ensure that there will be enough product supply to meet customer demand.

This is a key component of the supply chain management process because it also informs the planning aspects of other supply chain processes including material procurement, purchasing, logistics, and distribution.

Demand forecasting is essential to the planning process and allows companies to improve the ability to determine future demand by relying on internal data such as historical data, and external data such as weather, seasonal variations, supply chain constraints, etc., to determine how much supply needs to be produced to meet demand. When done well, demand forecasting can help companies make informed decisions that help them create enough supply to fulfill customer demand, gain insight to circumvent possible supply chain constraints, and potentially gain an advantage over their competitors.

For example, if a toy retailer realizes that shipments for one of the season’s most popular toys could be delayed due to port congestion, demand planners would evaluate the impact of the reduced availability and how it might affect downstream sales for them and their competitors. The demand forecast might have to be reduced (since if there are no products on the shelf—there will be no sales) but predicted sales of similar products that are available might need to increase. The demand planners would monitor this situation closely since the consequence on market share and long-term sales could be significant.

The Demand forecast is produced by Demand Planning because of supply chain activity lead times that consist of buy, make, and sell activities and customer service levels which are calculated from the customer expected lead time. This is the crucial balance of how long it takes for a business to deliver its product against how long a customer is willing to wait for it.

Therefore, businesses must create a demand forecast when their supply chain activity lead times are longer than customer expected order lead times. Optimizing supply chain activity lead times and improving customer service levels is an essential business activity and is a reason why demand forecasting is done.

Demand forecasting works like this; planners create a forecast using statistical or calculated methods. This baseline forecast can then be augmented by other forecasts such as from Sales and Marketing as well as insights from Product Management and Finance. The planners will measure KPIs such as forecast accuracy and bias, perform scenario or ‘what if’ planning, and ultimately create an enriched consensus forecast.

To build an accurate demand forecast, a planner must gather transactional data into measures and map it to dimensions, hierarchies, levels, and attributes that represent the business structure. This information, which is typically very large in size, will be managed in a software program, which will use calculations, time series models, or machine learning (ML) technology to generate the demand forecast. From there, the planner visualizes the forecast and uses exception management to identify issues that need to be resolved.

Key issues to be resolved could include managing product life cycles such as new product introductions, product transitions, and end of life dates as well as forecast accuracy, bias, and outliers. Planners can make forecast comparisons through tournaments, scenarios, and simulations to identify improvements and any necessary adjustments can be applied as forecast overrides.

The refined demand forecast will be assessed in Demand Reviews with Sales and Marketing. This team will consider options to close any gaps in the forecast to budget and exploit market share opportunities using events, promotion, and pricing strategies. Ultimately, a consensus forecast will be created, authorized, and used as a key input to the monthly Sales and Operations Planning meeting, and published for Supply Planning to use for purchasing, manufacturing, and delivery planning.

There are a few types of demand forecasting models that can be used by businesses to help determine future demand for their products.

• Passive Demand Forecasting  relies on historical data to predict future demand. It’s considered a simpler method of forecasting and can be useful for organizations with strong historical sales data.
• Active Demand Forecasting  uses external data like market research and additional data to determine potential demand from customers. This method can be more effective for companies that are newer (and lack substantial historical sales data) and for companies that are in a high-growth phase.
• Macro-level Demand Forecasting  relies on external conditions that could directly affect or influence the business and can help planners build out a strategy to capitalize on trends or influential factors that could drive business decisions.

Additional forecasting methods to consider include internal business forecasting, short-term forecasting, and long-term forecasting. Internal business forecasts help companies to focus on operational risks and opportunities within their own business and make adjustments that align with business goals.

Short-term forecasts use demand sensing and shaping at a granular level (products, customers, or days/weeks) and focus on a forecast horizon of a few months. Medium-term forecasts will be at more aggregated levels such as Product Category, Customer, and Month for a forecast horizon of 2 to 12 months. Long-term forecasts capture projected market and industry trends that are 1-2 years out and can help influence the types of products a business may want to carry based on consumer trends. Very long-term forecasts focus on bigger-picture industry developments that are 5+ years away and help companies plan for investment and growth in certain areas of their business.

Overall, demand forecasting helps companies not only predict potential demand, but also develop effective capacity planning and inventory management to ensure that there is enough supply on hand to meet demand in each region, and each channel that a company does business.

Can AI/ML forecasting help improve your forecast accuracy rapidly?

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About the author

Simon joiner.

Simon Joiner is a Product Manager of Demand Planning at o9 Solutions. He has over 20 years of experience in transforming Demand Planning Systems, Resources and Processes in such diverse sectors such as Pharmaceutical, Building Supplies, Agriculture, Chemical, Medical, Food & Drink, Electronics, Clothing and Telecoms. Simon lives in Hemel Hempstead in the UK with his wife and two (grown up) children and in his spare time likes to play guitar, research family history, walk the dogs and keep fit with running.

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To remain competitive in today’s relentlessly paced and ever-expanding marketplace, companies must think carefully about what products they’re developing and how they’re developing them, continuously iterating their processes to maintain a competitive edge. A finely tuned product development strategy is a holistic, cross-collaborative endeavor with the capacity to help any organization weather unforeseen events or market changes.

Consumers have access to more information than ever to compare products and brands. The relentless pace of technological advances can mean even the most innovative start-up finds a once-successful product suddenly out-performed or obsolete. And for legacy institutions with strong brand loyalty, existing products might not be enough to remain competitive over the long term.

With new markets and functionalities appearing almost overnight, product development can’t be a blind process. Successful companies fuse product development practices with overarching business strategies to ensure sustainable innovations that will resonate efficiently and sustainably with customers—both in existing markets and among new target audiences.

A successful product development strategy can:

• Diversify a product portfolio
• Enhance customer experience
• Improve sales and return-on-investment
• Support a growth strategy
• Support transitions into new markets

Traditionally, there have been three distinct ways for a business to grow through product development:

• Create an entirely new offering
• Tweak an existing product to cater to its target market
• Enhance a product for introduction to new markets

But offering a better product, or manufacturing one at a lower cost, is only a small part of a successful product development strategy. Today, as many as half of all companies—and 70% of top-performing companies— use software developed internally to differentiate themselves in crowded markets. As more businesses become software businesses, a long-term development strategy that prioritizes continuous feedback and core organizational value is key to success.

While individual organizations may use slightly different templates, and there is certainly no universal strategy to guarantee the successful commercialization of an idea, there are seven common steps in the product development process.

Typically, these measures should be undertaken by a dedicated development team or through a product development partnership with an experienced and specialized consultancy. The goal is to systematize the development process from brainstorming to launch, outlining critical benchmarks and allowing collaboration across departments as well as review from multiple stakeholders. These seven stages of product development are:

1. Idea generation

Prioritizing the long-term strategic goals and core competencies outlined, a business should brainstorm new initiatives, product ideas, or product features. During this phase, cross-collaborative efforts should focus on ideation and iteration. Considering customer needs and the business’ strengths, the product team generates product concepts. Taking cues from multiple departments and business leaders, those ideas are then screened to ensure only those ideas most aligned with the organization’s goals move forward.

2. Research

During this phase, the new product idea is placed within the context of the current market. Firms might conduct market research related to their new feature or product line, solicit customer feedback, or engage focus groups. During this process, a business should extensively research similar products and fully investigate the new product’s competitive advantage over other offerings to forecast an accurate future market share. All this effort culminates in the validation of the new idea, which helps business leaders identify how the product will perform.

3. Planning

Once the idea has been validated, the planning stage of the new product development process begins. This will likely involve collaboration between the product design team, project management, sales, and other departments as the business creates a detailed roadmap for how the new product will be built and deployed. This might include plans for integrating the new idea with current products or existing business structures. Depending on the product, this phase may also involve wire-framing and modeling as well as costing the price of materials or server space.

4. Prototype

A prototype is a crucial step in the product development process. Often, companies will build several prototypes and make significant changes to their original plans as they assemble a model of their eventual product. Occasionally, it might be necessary to build a handful of variations with different features, material or capabilities.

The end goal should be to create what’s referred to as a minimum viable product (MVP). The MVP is the most basic version of the new product without most of the extensive integrations or features that might be added over the time. This will become the sample as materials and vendors are sourced for mass production. In software applications, it may be important to test the prototype with end users to ensure an adequate user experience.

5. Sourcing and manufacturing

During this phase, a business gathers materials and contracts with partners, if applicable, to create a detailed plan for actual production. Depending on the scope and nature of the product, this could be as simple as hiring additional engineers and as complex as implementing new supply chain processes across the organization.

This is where a product management team becomes increasingly important, as sourcing can require extensive collaboration between vendors and across multiple processes. In cases of complex global sourcing and manufacturing needs, a business may elect to use software or databases specifically built for the task.

During this final phase before launch, a business should calculate the total cost of its product over a pre-determined product life cycle to verify the retail price and gross margin of its new initiative. The detailed consideration of business value, customer value and product value should help guide and simplify the costing phase, as they’ve helped facilitate an accurate estimation of return-on-investment.

7. Commercialization

After a lengthy design process, it’s time for the product launch. Before launch and during the planning process, a marketing strategy will have been developed to ensure target customers have access to the new product and appropriate distribution channels have been engaged.

Good product development prioritizes on-time and on-budget production or deployment. Great product development prioritizes value-based outcomes over a product’s entire lifespan.

Before considering how to implement the product development process, it’s important to step back and evaluate a business’ core competencies and potential long-term needs.

• What are the organization’s essential advantages and skills?
• How do those competencies work together in a unique way?
• What competencies might be needed in the future?
• How do those competencies align with an organization’s long-term strategic business plans?

It may be useful to rank these advantages—for example, the ability to deploy software quickly or strong strategic sourcing—to capture a deeper sense of where the business stands. Some researchers recommend plotting these variables on a simple graph according to how strategically important they are and how strong their current position in the company.

As the early phases of the product development process begin, organizations should weigh how their product roadmaps will respond to and measure three crucial types of value:

• Customer value : This metric describes the measurable impact when a customer uses a product, which essentially amounts to a basic value proposition. Will the proposed product or feature meet an unmet need?
• Business value : This measures product outcomes within the context of key performance indicators (KPIs) and the broader business strategy. Will a product or feature drive specific and measurable business value?
• Product value : This metric evaluates how much a product or service will be used against the resources required to build and maintain it. Will the benefit of a product or feature improve engagement and outweigh the resources expended?

Tracking these metrics can help an organization make a systematic plan to prioritize products and features. Even the most popular products won’t succeed over the long-term if they drain resources or fail to align with the business’ broader goals. These three value indicators are as important after a product is released as during initial brainstorming sessions. Testing a product and carefully evaluating its success should be a continuous and ongoing outcome rather than the final step in its development.

Historically, testing new product development strategies may have been the final phase of a project. But in today’s landscape smart business leaders iterate to provide continuous, value-based testing over a product’s lifespan.

The final phase of a successful product development strategy is open-ended. It involves the regular collection of data to analyze how products reflect an organization’s broader business goals. This may include soliciting user feedback over social media, tracking retention internally as customers use the new product, or periodically auditing the product to ensure it is capturing the best possible value for consumers and the business alike.

Today’s business leaders need to rethink competencies, operations, designing and sequencing workflows end-to-end with a way that unlocks, connects, and uses data where it is most effective.

IBM Engineering Lifecycle Management (ELM) is a comprehensive end-to-end engineering solution that stands at the forefront of the market, seamlessly guiding you from requirements to systems design, workflow, and test management, extending the functionality of ALM tools for better complex-systems development. By adopting an end-to-end view across the entire product lifecycle, enabling a digital foundation for data traceability, you can more easily track changes to minimize risk and reduce costs.

Explore IBM Engineering Lifecycle Management (ELM)

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