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

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

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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Sales Forecasting: How to Build a Realistic Forecast