©2018 by SPC 3.0

Developing and Executing Sales Forecasts

Here’s how to set up an effective sales forecasting model for your business.


Sales forecasting can be simple. If you have an existing business, you pick a number which usually represents a gain expected over last year's sales performance. But we all know that simple isn't a very good method or more companies that favor "simple" would be more successful. Simple does not effectively address persistent and ongoing problems in creating realistic forecasts and budgets to support those forecasts. There are too many variables, too many moving parts, too many unknowns. In the end, the simple sales forecast is more aspiration than it is science.


Most budgeting begins with the sales forecast because the forecast determines many different decisions: staffing, capital expenditures, inventory levels, and so on. If you are reading this blog, chances are good you began looking at your 2017 forecast and budgeting in the waning months of 2016 and perhaps firmed them up in early January. Now, it is nearly the end of March, the first quarter is almost history, and how well did you do? If your forecast is pretty much on target, great. If it is already off the grid, it is time to revisit the assumptions behind the projections you made only four months ago. Failure to adjust denies the dynamic nature of forecasting and budgeting. Forecasts and budgets are a process, not one-time events.


The goal of the sales forecast should be a careful balance between meeting sales goals and profit goals. The goal is to have profitable sales, not sales at any cost.


So how do you get acceptable—or good—results? Start with last year, the economic climate, your competition and things you have done to make your firm more effective (upgraded people, created processes and procedures to reduce waste, bring on new products or new customers, and so on). Exploit opportunities in good times. Hunker down in bad times, but not to the point of decimating your core capabilities. Companies that have won in good times and have solid profits and positive cash flows can usually benefit from downturns by acquiring competitors who are not as stable, gain customers who are under served, and perhaps build aggressive platforms for growth that are in place when the (inevitable) economic recovery happens.

Start up/early stage company forecasting and budgeting For start ups/early stage companies, the sales forecast is most likely going to a version of "simple" as described above. The forecast is usually dictated by available capacity and capital. If this is a product company, the limited capital has to be spent on equipment and acquiring/converting inventory into finished goods. If it’s a service business, the sales forecast is usually limited by customer demand, competent talent and the time available to deliver the service. That is generally true for many kinds of service companies (for example beauty salons, consulting companies, insurance agencies, and accounting or law firms).


The above observations are predicated on starting the company without orders in hand or client demand arranged before beginning operations. Having orders in hand reduces risk and enables a better degree of certainty in the early month or months of operations. In my experience, it is rare for the start up to begin with a "book of business."


Growing/established firm forecasting and budgeting The existing firm has a somewhat easier time in forecasting because there is a sales history in place, and many of the production/operations processes needed to satisfy customer needs have been determined and refined over time. For the existing firm, unless the sales process is a one-time or two-time sale (think Nature Stone, for example) or there is a long time between the first sale and the second sale (home painting, perhaps), the forecast is related to finding and converting suspects into prospects and then to customers. Many firms have a business model where the next sale to a present customer may be a year or more into the future, so the need to find and convert prospects into new customers is always present.

For companies whose customer base purchases regularly (think the grocery store, the lawn care company, other service firms where repeat business is likely), there is no substitute for efforts to retain customers. Even the best companies suffer customer defections. Lost customers who do not renew or are not retained drive the sales forecasting process to replenish the pipeline by acquiring new customers.


Driving the sales forecast. Because life for most firms begins with customer acquisition, the prime sales forecast focus must be on finding, servicing and retaining enough good customers to cover the overhead of the venture and make a reasonable profit. There are metrics in every business. What are the key sales metrics for your firm? Do you know how much it costs you, for example, to acquire a new customer? Is it the number of sales calls per day? The number of calls/visits per customer for long lead time selling? The amount of money spent on social media, direct marketing? The one thing I am certain about is once you have acquired a good customer (definition: profitable, satisfied with your service, pays promptly, not a lot of hassle), the cost to keep that customer is generally less than the cost of mining the potential field to take customers away from their existing service/product providers.


It is relevant to consider developing a solid marketing and customer service plan to support your customer acquisition and retention goals. Great companies that are successful in filling their restaurants, getting goods out the door fast, handling the inevitable customer problems (and so on) figure out how to do these things at least as good as, if not better than, their competition. That also means the sales force must be trained in the products/services you sell (waiters and waitresses in restaurants, the copier or office supply salesman, the person who is selling machining/shop services) on a regular/consistent basis. The best companies spend at least some time every week on training to upgrade product/service knowledge and customer satisfaction techniques so the customer needs/concerns are addressed in great ways to reduce customer defections.

The company described in the case study below did virtually all the things a good company should do to make sales forecasting and budgeting a scientific process. As you will see in the narrative following, things don't always go well, no matter how well planned.


A few years ago, I was asked by the President of a middle market company to help him establish a board of advisors to give him fresh outside insight into the problems and opportunities facing his firm. This company was a metal bender, providing components/sub-assemblies primarily to the transportation sector with a secondary customer base in food service equipment. The President, who was second generation, cut his teeth in sales and he was good at that job. He had taken the COSE Strategic Planning Course and had done extensive analyses of profitability and sales by customer and industry group.


His sales forecasts were driven by strategic business unit performance and competitive analysis. There were a limited number of customers. Sales mirrored Pareto's 20/80 axiom that 20% of the customers often make up about 80% of the sales. There were less than 150 total customers, with no single customer generating more than 10% of sales. He knew almost everything one should know about the top 25-30 customers that dominated the sales results. He and his top sales people got close to those customers, and they treated those customers very well, frequently hosting them at local and national sports venues and they even took several of those customers on fishing and hunting trips in unique locales.


The sales force were compensated based upon sales quotas established at the beginning of each fiscal year and were also tied to gross margins because there was a certain amount of discretion available in pricing or terms. Getting to 95% of the sales quota with no more than a 2% negative deviation from planned gross margin dollars on those sales dollars allowed successful sales people to receive substantial performance bonuses at the end of the plan year.


The sales forecast each year began by studying prior years' activity and trends for each of the top customers. The industries the firm served generally ran parallel to the health of the economy—when the general economy was good, the firm's customers generally did well, too. When the economy was in a downturn or recession, those customers similarly suffered. The President and his sales people regularly talked with the top customers about their own plans for the coming planning period and that input provided a pretty solid base upon which to make sales forecast projections. In other words, they did a lot of things right.


We had a board of advisors meeting in mid-December of the third year I had been on the board, just prior to the annual holiday party. The President was in a great mood. The cause for his elation quickly became apparent when he told us that for the first time in the 20+ year history of the company the annual sales forecast for the company had been met. Not all SBUs met their targets, but overall, the sales success was cause for celebration. I should add that the company typically forecast aggressively, and that year was no exception to that norm.

I was asked to stop by the headquarters in early January for an informal one-on-one advisory chat. The euphoria of mid-December had evaporated in late December and early January when the President started fielding calls from key customers asking where their year end orders were and when their products would be delivered. It didn't take long for him to discover the sales force had held back December orders (and deliveries), not placing them in the order book or production scheduling until early January. Almost 10% of annual sales (representing over $5 Million in sales) fell into this abyss.


We talked about how this happened. The President initially wanted to kill the offending sales people. When I suggested he might want to avoid committing a felony, he gradually calmed down. Upon further discussion, he realized he had created this behavior. As he explained to me, because historically the company had never gotten close to the actual forecast, this had not been an issue in the past. He further revealed his sales force knew from past forecasting, budgeting, quota setting and bonus practices, the sales quotas for the coming year would be higher than the quotas for the prior year. It could have been predicted, but wasn't, that the sales force acted in their own best interest to get a running start on the sales quotas for the new year. And, true to historical tradition, the new year's quotas were substantially higher than those quotas determined in the prior year.

Luckily, with a lot of back office scurrying and a prodigious production effort, almost all of the affected customers were able to be retained, but the company came very close to losing some long-term profitable accounts.


So even when you think you have it right, you might not!



  1. Simple sales forecasting is too easy and often does not produce good results.

  2. A sales forecast, whether established through scientific methods of analysis or aspirational, needs to be tied to budgets.

  3. Forecasts and budgets are a process, not an event. Results (sometimes even daily or weekly, but certainly monthly and quarterly) must be reviewed for progress (or lack thereof) towards profit and sales goals, with forecasts and budgets adjusted to reflect the new reality of the environment in which the firm operates.

  4. Expect the unexpected. Unfortunately, you cannot plan for every contingency, but how you react to the unexpected (held back sales, for example) is where the "rubber meets your road." Dealing effectively with crises is what frequently separates good CEOs from great CEOs and good companies from great companies.


Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970. A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and served as the principal instructor for the COSE Strategic Planning/CEO Development Course for 38 years. This course continues independently today as SPC 3.0.  The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses.

Learn more about the SPC 3.0 Strategic Planning/CEO Development Course at SPC30.com

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