Sales Forecast Formula for a New Startup- What it is and How to Get it Right

What is a Sales Forecast Formula?

Forecasting sales is a crucial exercise that organizations undertake to prepare for the ebb and flow of business.

There are two broad formulae you can use to forecast sales. Let's try to understand them with the help of examples. The first one calculates the total customer traffic, on the basis of which total sales can be predicted.

The calculation starts with a consideration of the total addressable market (TAM). For a coffee shop, for instance, the TAM would refer to all people who drink coffee in the world.

However, it's not reasonable to build a forecast that applies to the entire TAM. You want smaller, more realistic customer pools. So, you need to find the percentage of the TAM you can actually cater to. This is your serviceable market. The demographics of your customers will give you your target market.

All the people walking into your shop are your potential customers. How they can be converted into actual customers is the next puzzle you must solve. At the same time, you need to consider the percentage of customers who may not come back.

Let's now assume all the aforementioned variables throw up a monthly customer size of 1,000. If a customer buys a cup of coffee ($1) and a muffin ($3), a single order would average $4. You find that a customer usually places 10 such orders every month, spending $40. If you take all the customers into account, you would get a monthly sales value of $40,000. Multiply it with 12 to get an annual sales of $480,000.

The other sales forecast formula looks at how much sales an organization has been able to manage, and builds from there to predict the sales for the entire year.

A restaurant, for example, sells 9,000 hamburgers from January to March at $2.50 apiece. The restaurant, therefore, generated $22,500 in the first three months of the year. This translates into monthly sales of $7,500. This now needs to be multiplied by the number of months remaining to find the expected sales from April to December. In this case, the value rounds up to $67,500. Add this value with that of the first three months to get the annual sales forecast. Here, the total yearly sales value would be $90,000.

However, sales calculations don't always follow such clean, straight lines. Sales in one month may vary widely from those in other months. A business needs to make adjustments for factors like inflation, technological and legislative changes, and shifts in consumer preferences. An automated software solution, in this regard, does a far better job than a human analyst.

Why is Sales Forecasting Important?

A precise sales forecast benefits businesses significantly. Here's how-

1. Robust inventory management- Overbuying can result in storage space, food, and dollars being wasted, while underbuying can result in disgruntled customers, who are denied their favorite dish due to a shortage of ingredients. By preventing overestimation or underestimation of demand, and helping bridge the gap between projected and actual utilization of resources, a sales forecast ensures inventory optimization.

2. Smarter decisions- Predictive analytics is used by sales and demand forecasting systems to direct choices. Therefore, businesses can make critical decisions on menu expansion, hiring, employee scheduling, supply chain management, and technology adoption by analyzing historical data on sales.

3. Better workforce management- Staffing requirements can be effectively planned by predicting the accurate level of demand. With the help of sales forecasts, organizations can schedule the appropriate number of workers required for every shift to maintain high productivity and avoid resource wastage. Optimal utilization of workers allows businesses to keep labor costs under control.

4. Successful business pitches- The sales forecast of a business has to be clear, ambitious, and cover a sufficiently long time period for it to be considered attractive by investors. Moreover, there has to be alignment between the sales forecast and the sales pipeline, which is a representation of where the prospective customers of a company are in their purchasing process.

5. Meticulously planned budgets- The main goals of a company's budget are to maximize profits and reduce costs. Entrepreneurs can reduce food and labor costs, retain suppliers that deliver the largest benefits, hold on to customers providing good value, and make other decisions vital to business functioning on the back of effective sales forecasting. Factors conducive and inimical to growth need to be considered when forecasting demand and sales.

Forecasting sales can be a difficult task, especially for new startups.

How do you know if your product will sell? How do you know what to manufacture? How much inventory should you hold?

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What Can Happen if a Restaurant Doesn't Forecast Sales?

A restaurant that gives short shrift to sales forecasting will eventually flounder in the dark. It would not be able to accurately predict the quantity of ingredients it would need in the future, and would invariably end up underestimating or overestimating demand.

Without a sales/demand forecast, restaurants would not understand the urgency of reordering certain ingredients. As a result, it may put off placing orders, or drag its feet while dealing with supply chain bottlenecks and end up facing stock-outs, and hordes of dissatisfied customers.

Fast food chain KFC learned this the hard way, with a massive chicken crisis caused by a supply chain problem, resulting in outraged customers complaining to the police and members of parliament.

Moreover, a scant idea of future demand may cause a restaurant to buy more food than it would require, resulting in food rotting on the shelves. An average American throws out food weighing nearly a pound every day.

US restaurants are one of the biggest culprits when it comes to wasting food. They are believed to waste around 30 billion pounds of food annually.

Restaurants are misspending dollars on food they don't need. The food cost of a restaurant usually amounts to 28-35% of its revenue, but wastage adds to that cost. The yearly cost of wasted food in restaurants is believed to be $162 billion.

Restaurants ignoring sales forecasting are also unable to control labor costs, which make up 30-35% of revenue and result in the biggest dollar outgo for restaurants. Without knowledge of what demand may look like in the future, a restaurant may call too many workers during periods of slow traffic, schedule too few workers during times of hectic activity, and end up incurring wasteful expenditure or providing subpar customer service.

Without sales forecasts, restaurants would also not be able to take decisions on menu management, menu pricing, vendor management, customer relationship management, or tech adoption. It would not be able to effectively pitch its business to investors either.

The importance of demand planning and sales forecasting for restaurants can, in fact, be firmly established with an example related to the Covid-19 pandemic.

Certain restaurants, perhaps expecting the popularity of tech-enabled dining in the future, had introduced features like curbside pickup, third-party delivery, drive-thrus, and so on even before the pandemic. Although nobody could have predicted or prepared for the pandemic, the restaurants that went tech forward survived the Covid onslaught, while those that had stuck to old-fashioned methods of doing business found themselves in trouble.

7 Sales Forecasting Methods

1. Forecasting based on sales cycle length- This method determines the likelihood of a deal being struck. Your sales forecasts will become more predictable if you know the mean sales cycle length. Sales cycle, in this regard, refers to all the steps in a sales process from initial contact with a lead, to the actual closing of the deal and following up on it. If you are able to receive a certain number of leads, you can anticipate the sales volume for the coming month or a collection of months.

2. Opportunity stage forecasting- This involves the sales team dividing the sales pipeline into various stages. This exercise allows you to precisely forecast your chances of closing a deal. Companies can segment the sales pipeline into various stages, such as identification of possible customers, finding those that are most likely to buy, product demonstration, negotiation, and finally, clinching of the deal. A sales prospect reaching the end of the pipeline has a higher probability of turning into a customer.

3. Historical forecasting- This approach involves using past sales data to predict the future. It works on the assumption that the growth rate of your organization and future sales would be at least as large as what was achieved in the past.

4. Intuitive forecasting- This method of sales forecasting is based on the instincts of the sales reps. The sales executives use their intuition and experience to estimate the likelihood of closing deals.

5. Multivariable analysis forecasting- It involves the consideration of numerous variables. It is among the most accurate and advanced forecasting techniques. The performance of sales reps, the duration of sales cycles, and the kind of sales opportunities are some of the variables used.

6. Pipeline-based forecasting- This examines each opportunity in the sales pipeline and analyzes it based on a number of variables, including age, deal type, and agreement stage.

7. Test market analysis forecasting- It collects customer data to gauge consumer approval of new products. Large organizations frequently use this method while launching products.

How to Select the Best Forecasting Method for Your Business

The best sales forecasting technique for your business depends upon a number of factors.

First and foremost, you need to consider if you have a pool of historical data from which you can draw. Past sales data will allow you to base your predictions on facts and numbers. A startup that has been running for just a few years may not have a lot of past data to fall back on, but it can still undertake sales forecasting based on figures derived from businesses that have been operating for a longer time and are similar in size, targets, technology adoption, product mix, and so on.

Alternatively, the lack of historical data can be counteracted by the use of qualitative forecasting techniques that draw from the intuition and opinion of subject experts.

How much money and time you are willing to spend, and the degree of accuracy you want would also determine your forecasting technique. If, for instance, you want to dive deep and draw up a comprehensive and highly precise forecast, you may combine several techniques like multivariable analysis forecasting, test market analysis forecasting, and so on.

Accuracy of a forecast would be extremely important for a business looking to prepare a budget, while a general estimation would suffice for one trying to ascertain if it should enter a market.

Businesses affected by seasonal changes, shifts in consumer preferences, the proliferation of technology, and economic slowdown need to use forecasting techniques that adjust for these influences and the business cycles.

Even though quantitative approaches are usually the most precise, they work best for predicting outcomes in the near term. In case you want to see far into the future, you would be better off depending on expert opinion instead of statistics.

Figuring out the best sales forecast formula for your business can be a challenge.

You have to take into account so many factors that it can be difficult to know which one will work best for you.

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Advantages of Forecasting Software

Thanks to a sales forecasting solution linked with the POS setup, business owners can access a lot of information on revenue, labor, customer demand patterns and footfall, discounts, and ordering density through third-party apps and restaurant websites.

Sales forecasting software helps in the analysis of these data to generate real-time actionable insights that can be accessed anywhere, at any time of the day, and on any mobile device.

Technology enables business leaders to keep an eye on key performance indicators (KPIs) and make choices on the go. Sales analytics software gives sales teams considerable visibility of sales activities and helps monitor the performance of sales reps. It also tracks the performance of products in terms of their sales. With the support of sales analytics, the performance of sales drives in the present and the future can be identified.

Through an in-depth analysis of current and past data, business analytics software working in tandem with sales forecasting software allows restaurants to better prepare for the future. With the help of software, restaurants are able to rank menu items in descending order of popularity, based on which they can decide which items to retain, promote more actively, and which ones to discontinue so that profits can be maximized. Similar decisions can be taken on franchise stores as well.

Business analytics and sales forecasting software also allow businesses to see the impact of new advertising campaigns and loyalty programs on sales, and predict how these initiatives may influence future sales.

With the help of demand planning and sales forecasting solutions, restaurants are able to undertake Inventory Control and inventory optimization, ensuring that they always remain well-stocked, and avoid deadstock. Projected sales also helps optimize staff scheduling.

The beauty of software solutions is that most tasks are automated, and even if a business wants to plumb the extreme depths of data and create comprehensive and complex projections that accommodate a plethora of variables, they can easily do so with the help of software.

Artificial intelligence allows businesses to go to extents that are not possible for human analysts. Such projections are usually extremely close to the future reality. Manual errors and amateurish guesswork can be minimized through software solutions. Tech-enabled forecasting is also much faster and allows restaurant employees to devote their time and effort to other business pursuits.

The Zip Forecasting solution, which is available on the Hubworks app store, is one of the best sales/demand forecasting products in the market at present.

Conclusion

Sales forecasting is a vital tool that businesses need to employ to ensure success. Forecasting demand and sales allow organizations to learn from mistakes made in the past.

Accordingly, if a restaurant had been generating an inordinately high quantity of food waste, it may well be because it had not optimized purchases and ended up wasting money on stocks that were not necessary. Had it known how demand and sales would pan out in the future, it may have stopped short of overbuying.

Learning from mistakes automatically leads to the next step, which is to prepare better for the coming days. Accordingly, an employee schedule made at the start of December would envisage bigger staff numbers per shift to take care of the Christmas-New Year rush. Better preparation would mean lower costs and higher profits.

Since it's impossible to predict the future with 100% accuracy, efforts should be made to reach as close to an accurate benchmark as possible. Greater the number of variables considered, higher the chance of sales predictions being spot on. Sales forecasting software makes sure that forecasts don't deviate from reality by a large margin. Sales forecasts, despite a considerable degree of preciseness, may have to be revised midway as a result of pressure exerted by a combination of various factors.

However, all said and done, sales forecasts are a key part of functioning for organizations. For startups seeking to do brisk business while preventing wasteful expenditure, sales forecasts are particularly crucial. Small businesses aim to achieve optimal resource utilization, and sales forecasts help them accomplish exactly that.

Forecasting is hard. You need to know how many sales you’ll be able to make, but how do you know how much demand there will be?

Forecasting is a necessary part of any business. It helps you plan for the future and meet your goals.

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