Sales forecasting is one of the most important parts of financial planning.

Whether you run a theatre company, a dance organisation, a shop, a manufacturing business, or work as a freelancer or consultant, you need some idea of what future income might look like.

The problem is that a sales forecast can go wrong in two directions.

We can become wildly ambitious and produce numbers with very little behind them.

Or we can become so cautious that we underestimate what the business is genuinely capable of.

A useful forecast sits somewhere between fantasy and unnecessary pessimism.

About this episode

Looking into the future does not mean pretending we have a crystal ball.

We cannot predict the next 12 months with complete certainty.

What we can do is form a sensible view of what may happen and test whether our assumptions make sense.

In this episode, we look at how to approach sales forecasting, the dangers of relying too heavily on history, how to challenge ambitious forecasts, why excessive caution can be just as damaging, and how to keep your assumptions visible and useful.

How to approach sales forecasting

Do not simply copy last year

One of the easiest ways to build a sales forecast is to look at what happened before.

Perhaps sales were £100,000 last year, so we add 3% or 5% and call that next year's forecast.

History is useful evidence.

But it is not automatically the future.

There may have been unusual events in the previous period. Customer behaviour may have changed. Your product range may be different. Prices may have moved. Marketing activity may be stronger or weaker.

So use historical sales as information, not as a substitute for thinking.

“Always let the story of your business guide your forecasting.”

Give ambitious numbers something to stand on

There is nothing wrong with ambition.

If you genuinely believe sales can rise by 50%, put that into the forecast.

But then ask why.

Suppose a theatre expects a large increase in ticket revenue.

We would want to understand:

• how many performances are planned
• how many tickets can actually be sold
• expected occupancy
• ticket prices
• audience demographics
• historical attendance
• marketing activity
• audience development plans

If projected sales jump dramatically but nothing else in the business changes, the forecast needs challenging.

There should be a coherent story behind the number.

Do not become unnecessarily pessimistic either

Forecasting problems do not only come from excessive optimism.

We can also play things too safe.

Suppose the business is investing heavily in marketing, improving conversion, reaching new customers and expanding capacity, but the sales forecast barely changes.

That deserves questioning too.

Excessive caution can affect decisions later in the plan.

We may delay recruiting people we need.

We may avoid investing in equipment or resources that could support growth.

We may leave opportunities open for competitors.

The objective is not optimism or pessimism.

It is realism backed by evidence.

Stress test your sales forecast

Spreadsheets and forecasting software are very good at calculations.

They are less good at challenging the thinking behind those calculations.

A spreadsheet will happily multiply an unrealistic assumption by twelve months and present the result beautifully.

That does not make it correct.

“Question them, interrogate them, stress test them.”

Take the assumptions behind the forecast and ask what happens if they change.

For example:

• What if sales volumes are 10% lower?
• What if conversion rates improve?
• What if ticket occupancy reaches 80% instead of 60%?
• What if prices increase?
• What if a marketing campaign produces fewer customers than expected?
• What if demand is stronger than expected?

These what-if scenarios help us understand how sensitive the plan is to the assumptions underneath it.

Document your forecasting assumptions

A good sales forecast should not just contain numbers.

It should also record the assumptions used to create those numbers.

Those assumptions might include:

• expected customer numbers
• average selling prices
• occupancy or participation rates
• web conversion rates
• marketing activity
• customer buying behaviour
• inflation or wider economic pressure
• product launches
• changes in capacity

Writing the assumptions down makes the forecast easier to revisit.

When something changes, we can see which assumption needs updating rather than rebuilding the entire plan from scratch.

This is why forecasting is not simply about creating a document once a year.

It is an ongoing planning process.

Treat unusual history carefully

Historical information can contain events that are unlikely to repeat.

The changes in buyer behaviour during the pandemic are a good example.

More people stayed at home, buying patterns shifted and many businesses moved more activity online.

Those figures may be useful historical evidence, but we should not automatically assume the same behaviour continues indefinitely.

The same principle applies to any unusual period.

Ask whether what happened before represents normal trading conditions or an anomaly.

Sales forecasting drives the rest of your financial plan

Your sales forecast does not sit in isolation.

What you expect to sell affects:

• staffing requirements
• stock or materials
• marketing expenditure
• equipment
• delivery capacity
• other operating costs
• cash requirements

If sales are forecast to grow significantly, the rest of the business may need to grow with them.

That is why the sales line is such an important part of budgeting and financial forecasting.

Once the sales forecast is built, those assumptions can also feed into your cash flow forecasting.

Use systems to support the thinking

Good systems make forecasting easier, but they do not replace judgement.

A digital accounting system gives us useful historical information that we can analyse and compare with our assumptions.

Tools such as Xero can help us keep financial information organised.

Planning software can then help us build scenarios and update forecasts without repeatedly rebuilding spreadsheets.

You can also explore BudgetWhizz for business planning and forecasting.

The important point is that software can crunch the numbers.

We still need to provide the critical thinking.

What if your business has no sales history?

A new business, new product or new service may have little or no historical information available.

That does not mean a sales forecast is impossible.

It simply means we cannot lean on past sales in the same way.

Instead, we may need to build assumptions from:

• market size
• pricing
• capacity
• expected customer numbers
• marketing activity
• conversion assumptions
• comparable products or services

The same rule still applies.

There needs to be substance behind the number.

A practical sales forecasting checklist

1. Start with your business story. What do you genuinely expect to happen?
2. Look at historical sales. Use them as evidence, not an automatic answer.
3. Identify unusual historical periods.
4. Write down your assumptions.
5. Connect sales growth to marketing and operational activity.
6. Challenge very optimistic numbers.
7. Challenge very pessimistic numbers too.
8. Run what-if scenarios.
9. Consider the costs and resources required to support the forecast.
10. Review and update assumptions regularly.

FAQs

What is sales forecasting?

Sales forecasting is the process of estimating the revenue or sales a business expects to generate over a future period using assumptions about customers, prices, demand, activity and other relevant factors.

Should I use last year's sales to forecast this year?

Historical sales are useful evidence, but they should not be copied forward automatically. Consider what has changed, whether the previous period contained unusual events and what activity is planned for the future.

How do I know if a sales forecast is realistic?

Ask what assumptions support the number. Compare it with historical performance, capacity, pricing, customer behaviour and planned marketing. Then stress test those assumptions using different scenarios.

Can a sales forecast be too cautious?

Yes. Excessive pessimism can lead us to underinvest in staff, equipment, marketing or other resources and may unnecessarily restrict the business.

What assumptions should I include in a sales forecast?

Typical assumptions include prices, customer numbers, sales volumes, conversion rates, occupancy, marketing activity, market conditions and any changes in the capacity of the business.

What is the difference between sales forecasting and cash flow forecasting?

A sales forecast estimates future revenue or sales activity. A cash flow forecast looks at when money is expected to enter and leave the bank. Sales are an important input into cash forecasting, but the two are not the same thing.

Episode Timecodes

• 00:00 - Why sales forecasting matters
• 01:33 - Looking through the windscreen of the business
• 02:02 - Using historical sales patterns
• 02:44 - Why history may not repeat itself
• 03:04 - Stress testing forecasts
• 03:25 - Challenging ambitious sales growth
• 04:27 - Avoiding excessive pessimism
• 04:45 - Buyer behaviour and historical anomalies
• 05:13 - Documenting assumptions
• 06:01 - Why sales forecasting drives the financial plan
• 06:37 - Using accounting and planning systems
• 07:15 - Forecasting without historical data
• 07:31 - Putting substance behind the numbers

Related episodes and guides

• Cash Flow Forecasting: 8 Tips to Predict Your Cash Flow
• Why Cash Flow Matters in Business
• Cash Flow Management Strategies: 7 Ways to Build Resilience

Key takeaway

Good sales forecasting is not about predicting the future perfectly.

It is about putting a sensible story behind the numbers.

Use history, but do not become trapped by it.

Be ambitious where the evidence supports ambition.

Do not become unnecessarily cautious either.

Write down your assumptions, challenge them and keep revisiting them as circumstances change.

The spreadsheet gives us the numbers.

The value comes from the thinking behind them.

Further Support

If you need help building a sales forecast, financial plan or cash flow forecast, you can contact us for an initial chat.

You can also explore BudgetWhizz for practical business planning and forecasting.

Our free online business calculators can also help with wider financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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When you are preparing your business financial plans, (and if you're not preparing your business financial plans, why not), sales forecasting plays a vital element. This applies to whether you're a theatre company, a dance company, a business that makes things, you work as a retailer, your business is as a freelancer, consultant.

Doesn't matter. This topic, the topic of sales forecasting, having an idea of what your income will look like is vital for your success. In today's episode of I Hate Numbers, I'm going to explore the dangers of being too ambitious or even too cautious in your outlook. I'm going to provide some practical tips and sanity checks to help you keep your forecast on track.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks, and welcome to another episode of I Hate Numbers. I'm your host, Mahmood, business finance fixer, author, and tax advisor and owner of the firm I Hate Numbers and Numbers Knowhow. I love to present topics in a sort of jargon free way to help you and your business thrive, let alone survive. Let's crack on.

Now when we look into the future, when we look through the windscreen of our business, we're not playing the role of crystal ball gazing. We're not saying with 100 percent certainty what the future will look like. If you were to do that, then you would adopt some incredible superpowers. We're trying to navigate through an uncertain landscape, and we cannot predict, it's absolutely impossible to predict with 100 percent clarity and certainty what the next 12 months will bring.

However, as business owners and planners, we've got to form some idea of what may lay ahead. Now one common approach that businesses will adopt when they try and forecast their sales, their forecast, their revenue lines, is to look at history. And I don't mean historical books, but historical sales patterns,

see what's happened before, and use that as a basis to project forward. Now this method, albeit easy in some respects, can be quite restrictive and lack ambition. If your approach is to merely say, let's match what we did last year, perhaps add on a couple of percentage points, there are inbuilt limitations to this approach.

History, what's happened before, may not repeat itself. There may be abnormalities, there may be anomalies that have happened historically that will not repeat themselves. Now computers, planning platforms, can crunch the numbers. And please check out the show notes by the way for BudgetWhizz, a powerful online tool

developed by Numbers Knowhow. I digress. Computers and planning platforms lack the human touch. They lack that critical insight, that critical thinking. So whether you're basing your sales forecast on history, or your future aspirations and ambition, make sure you subject that forecast to some stress tests, some what if scenarios.

So if you're planning for a 50 percent increase in revenue, for example, from your theatrical performances, then certain critical questions need to also be answered. What is it you're basing this increase on? Does it coordinate? Does it align with the number of tickets sold? Occupancy in the theater? The demographics of the audience and what their spending behavior and their buying behavior is?

Does it reflect historical performance? Do you have some form of evidence to support the figures that you're coming up with? What's the marketing efforts that you're investing in to achieve this? If you expect a dramatic sales growth, but you're not backing it up by any sustained and powerful marketing activity.

If you don't have a action plan to support that, then that's going to be quite fanciful. By the same token, if you're spending and investing a lot of money in audience development, in getting new people to buy from you, getting the same people to buy from you, but you're expecting a very small level of uptake on your sales line, then there's got to be something awry there.

Now if you are overtly pessimistic in your forecasts and there is a tendency to be pessimistic on the sales line and effectively very pessimistic in terms of how much we're likely to spend, then it's crucial you consider all the factors that may influence your sales. All those factors that influences buyer behaviour.

So, for example, as we mentioned earlier, have you factored in occupancy rates, participation levels, and any anomalies that have occurred historically but are unlikely to repeat themselves going forward? Always let the story of your business guide your forecasting. We go back in time, buyer behaviour, for example, during lockdown, where more businesses went online, where people were at home, businesses were more home-based, buying patterns and behaviors changed.

That may not replicate itself as we enter a brave new world where lockdown is not quite behind us, but it's a thing more so of the past. Now one other thing to note when it comes to forecasts is to make sure you've got clearly stated and documented assumptions. This allows us to revisit and modify our forecast while keeping an eye on those variables that are likely to change.

If we made assumptions about perhaps economic pressures from inflation, consumer price indexes, how much people are likely to be spending on average, conversion rates from our web traffic, and stating what assumptions are, make sure we can track those assumptions, make sure they're reasonable, and like with any planning, planning is not about a plan, it's about an approach, it's about a mindset.

It's about a methodology. And all the time we're revisiting and questioning the assumptions on which we base our forecasts. What else is worthy of saying? Now when you are creating your sales forecast remember is first and foremost the most vital part of your budget. The most vital part in your financial forecasting.

The sales line, what you're going to generate by revenue, will have an impact on what you're going to invest, the resources that you have to deploy. The cost that you're likely to be incurring. Don't question the numbers straight away, immediate them. Spreadsheets can give us that false sense of hope.

Question them, interrogate them, stress test them. Subject them to a what if scenario. This will help overlay the costs and resources that you need for your business. To make life easier, all businesses, in my opinion, should have a digital eco accounting system. Typically something like Xero that we implement for a lot of our clients.

You can not only track and record the data, but we can visit that. We can extract historical patterns. You can, if you've got a planning system, like BudgetWhizz and also integrate it. And therefore you can formulate your plan and you can extract the data and make it sink and make them coordinate quite easily.

Now, if your business is one that's starting from scratch, there's no history. It's a new startup, perhaps a new product that you're rolling out, then there are still methods available to create that sales forecast. We'll pick that up on a future episode on I Hate Numbers. So what can we summarise folks?

Well, in summary, when it comes to financial forecasting, make sure there's substance behind your numbers, whether you're aiming for the stars or perhaps playing it safe, be ambitious, but back it up with solid reasoning, with some degree of coherency and rationale. Avoid undue pessimism which could not only limit your potential but impact your business negatively.

You may delay on investing in recruiting new staff, investing in assets which are going to help you generate funds for the future but if you're overtly cautious when there's no good cause to do so, again, you're going to be limiting your ambition and opening the door for your competitors to come in. I hope you found today's episode useful folks and I'd love to hear your thoughts and experiences with forecasting.

How do you adopt that? How do you go about it in your business? Feel free to share your thoughts. Until next time.

We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.