How do you forecast future sales?
The word “forecast” means – “to predict or estimate (a future event or trend)”.
Cash is tight. You must get your sales forecast to determine your cash-flow.
People make one fundamental error in forecasting sales.
They treat sales like it is one thing.
Sales are not one thing. Sales are three things.
And, those 3 things must be separately measured. It is the only way you can gain control of your forecast.
Sales are a lot like profit. We measure net profit and we measure sales. But they are more like a scorecard result than an item you can impact directly.
Let me give you a simple example. Take the game of hockey. You want the score to go up. (Think of the score like sales).
How do you do that? You are the coach. How do you score more goals?
More shots on goal might lead to a higher score. So, focus on “shots on the net” in order to get a higher score.
What are the 3 things that make up sales? You will groan because it is so obvious. Yet it is missed all the time.
The first is….
Number of Customers
The first question to ask is – “how many active customers do we have right now?”
They must be actively buying from you. Not just on a customer list.
Sales are from customers buying stuff. To increase sales, you must look at increasing the number of customers.
The first number to “find” is your number of customers.
Let us say you have 300 customers. Great, that is what we start with.
The second number we must find is…
How Often Do They Buy?
How many times (on average) does each customer buy from you?
This is called “Transaction Frequency”.
You get this number by dividing the total transactions in a given period (1 year, for example) by the number of active customers.
In our example, let us say you had 15,000 sales transactions last year.
You divide 15,000 by 300 customers and you get 50.
Fifty is the average number of times each customer is shopping. (300 x50 = 15,000).
Said another way, they are shopping a little less than once a week throughout the year.
You now have two critically important numbers.
Number of customers, and, the frequency that they shop, on average.
The third number in our secret formula is…
The Average Sale Per Transaction
How much does each customer spend when they purchase from you?
To get this number you first find your total sales for the period. Next find your total transactions.
Imagine your sales for the past 12 months are $3,150,000. We know the total transactions are 15,000 (see above).
The average sale per transaction is $3,150,000 divided by 15,000 = $210
Putting it all together we have 300 customers shopping on average just over once a week (50 times a year) and spending $210 per purchase.
30 customers x 50 times of shopping x $210 spent each time = $3,150,000.
Why is this so important?
You cannot make the score go up in hockey by staring at the scoreboard. More shots on goal are needed.
You cannot make sales go up without focussing in on these 3 separate items. You will need a separate strategy for each one.
Before we look at strategy, let us look at how the numbers interact.
Take a look at this table:
Components of Sales: | Present | Change | Possible |
Position | Factor | Position | |
Number of Customers | 300 | 5% | 315 |
* Average Purchase Frequency per annum | 50 | 5% | 52.5 |
Number of Sales Transactions | 15,000 | 16,537.5 | |
* Average Sales Value | $ 210 | 5% | $220.50 |
Total Sales Revenue | $3,150,000 | $3,646,518 | |
Increased Sales | $496,519 |
Note the amazing power of a small 5% increase in each of those 3 areas. Compare that to concentrating on only one area!
In Summary
Sales can increase by $500,000 in this example. How? With a 5% increase in 3 areas:
- 5% increase in number of customers
- 5% increase in how often they shop on average
- 5% increase in how much they spend when they shop
Each area has a different strategic focus. To get new customers is expensive. To get them to come back more often requires a different mindset. It is also way less expensive.
So, the lesson is this – when forecasting sales do not just add a percentage to last year’s sales and hope for the best.
First break down your sales into this 3-part formula.
Finally, work on increasing each of the 3 parts with a different strategy. That is more for another Blog.
Thanks for reading…