How to master sales forecasting

Whether your business manufactures kitchen tools or luxury loungewear, imagine knowing how much you'll sell in the future. For small and medium-sized businesses, sales forecasting is the next best thing.

By prioritizing this strategy, you can potentially optimize resource allocation, improve inventory management, and prevent overstocking or stock shortages.

Ready to make some predictions? Learn the basics of sales forecasting and discover how it can shape the success of your business. Plus, follow our step-by-step guide to get started now.

What is sales forecasting?

Sales forecasting involves predicting future sales based on data, trends, and other factors. The result? Businesses may be better equipped to anticipate demand, allocate resources effectively, and make informed decisions to achieve their revenue goals.

How to forecast sales

From seasoned business owners to anyone just starting out, mastering sales forecasting can empower you to make informed decisions, optimize resources, and enhance your overall business performance.

Let’s begin by following these general steps to sales forecasting:

  • Collect and analyze historical data
  • Conduct market research
  • Pick a forecasting method
  • Utilize data-driven tools and software
  • Involve your team
  • Adjust for seasonality and other relevant factors
  • Monitor and adjust as needed

Collect and analyze historical data

How much inventory did you sell five years ago during the holiday season? What about every other year since? Are certain weeks busier than others? These are questions that may arise when you collect and analyze your sales data over time.

Historical sales data offers insights into past performance and can serve as a foundation for accurate sales forecasting. Get started by:

  • Gathering sales data from all relevant sources, including point-of-sale systems, online transactions, invoices, and manual records. Ensure that you capture data consistently across all sales channels.
  • Verifying the accuracy of your sales data. Any discrepancies or errors should be corrected before analyzing.
  • Organizing data into categories such as product types, customer segments, sales channels, and time periods.
  • Reviewing it for patterns and trends. Look for recurring sales cycles, seasonal fluctuations, or shifts in customer preferences.

Conduct market research

Market research may inform sales forecasting by providing information about customer preferences and industry trends. Here are some factors to consider:

  • Customer understanding. By analyzing demographic data, psychographics, and purchasing habits, companies can segment their customer base and make sales predictions tailored to specific groups.
  • Demand estimation. Through surveys, interviews, focus groups, and other methods, market research can gauge customer demand for specific products or services — which can then help estimate future sales volume.
  • Competitor analysis. Researching competitors enables businesses to assess market trends, pricing strategies, and the competitive landscape.

Pick a forecasting method

There are several different types of sales forecasting methods available. Here are common examples:

  • Qualitative sales forecasting. This method relies on expert opinions and subjective assessments of your brand’s customer journey and market research, making it quick to implement but potentially lacking precision. It can be suitable for SMBs in dynamic markets or with limited historical data.
  • Quantitative sales forecasting. Data-driven and objective, quantitative forecasting uses historical sales data for accuracy but may not adequately account for sudden market shifts. It may be best for SMBs with substantial historical data and relatively stable markets.
  • Time series analysis. This approach is designed to identify seasonal trends and historical patterns but may struggle with abrupt changes or irregular data.

Utilize data-driven tools and software

When it comes to sales forecasting, using data-driven tools and software can help speed up and fine-tune the process. Here are some of the benefits you may experience:

  • Improved accuracy. These tools leverage data analysis and algorithms to provide more accurate sales predictions compared to manual methods, reducing forecasting errors.
  • Time saved. Automation of data collection and analysis streamlines the forecasting process, saving time for sales teams and allowing them to focus on strategic tasks.
  • Planning. Businesses can model various scenarios and assess their potential impact on sales, allowing for better risk management and contingency planning.

Explore more helpful tools to run your business, including inventory software.

Involve your team

Involving multiple departments, such as sales, marketing, and finance, in your forecasting process can help better your predictions. For example, sales teams possess on-the-ground insights, marketing can provide customer behavior data, and finance may offer a clearer financial perspective.

Help improve collaborative forecasting with these tips:

  • Open communication. Foster regular communication and information sharing between teams to ensure everyone is aligned. Hold joint meetings to discuss insights, challenges, and forecasts.
  • Shared data. Implement integrated software and tools that allow seamless data sharing and analysis across departments.
  • Clear roles. Define roles and responsibilities within the forecasting process.

Adjust for seasonality and other relevant factors

Your sales projections will likely look different for December compared to other months of the year. June may be a busy time for your operation, while August and September may be quiet. What’s more, your product or service may be more in demand at certain points in the year compared to other times.

That’s why accounting for seasonality and other external factors and influences like annual sale campaigns, customer preferences, and historical shopping patterns are key.

Here are some strategies to help:

  • Data analysis. Examine historical sales data to identify seasonal patterns and fluctuations. Look for trends in specific months, quarters, or holiday seasons.
  • Smoothing techniques. Use statistical methods like moving averages or exponential smoothing to smooth out seasonal variations and extract underlying trends.
  • Scenario planning. Develop multiple sales forecasts based on various economic scenarios, allowing for quick adjustments if economic conditions change.
  • Diversification. Consider exploring new markets or product lines to reduce dependency on a single market or industry that may be highly susceptible to increased risk.
  • Marketing campaigns. Plan targeted marketing campaigns and promotions to leverage increased customer activity during peak seasons.

Monitor and adjust as needed

Once you’ve created a forecast, the work is far from over. Continuous monitoring and adjustments are essential to adapt to dynamic ever-changing market conditions. Plus, unexpected events, like natural disasters or economic crises, can disrupt sales patterns

To track and adjust forecasts effectively, regularly review actual sales against predictions, calculate variances, and dive deeper into the reasons behind deviations. Determine if they are due to one-time events or if they indicate a shift in long-term trends.

Using PayPal to run your business

Sales forecasting provides a glimpse into the future, helping organizations make informed decisions about inventory, resource allocation, and strategic planning. By harnessing the power of data and trends, sales forecasting empowers businesses to anticipate market fluctuations, seize opportunities, and navigate challenges with agility.

Learn about PayPal POS and discover solutions that may help run your business effectively.

Frequently asked questions about forecasting sales

Was this content helpful?

Related content

Sign Up for the PayPal Bootcamp

In partnership with three expert business owners, the PayPal Bootcamp includes practical checklists and a short video loaded with tips to help take your business to the next level.

*Required fields.

We use cookies to improve your experience on our site. May we use marketing cookies to show you personalized ads? Manage all cookies