How to forecast for your business.

You know you need a forecast for this year, but don't know how to go about it?  

Forecasts come in many shapes and sizes, on spreadsheets, cloud apps or back of napkins.  All either fit into either a "top down" or "bottom up" method of forecasting.

Top down means setting high level figures for sales and working down from there.  These figures can come from demand estimates, what you did last year, or what your goal is this year.  

For example the questions you might ask in a top down forecast might be:

  • What level of sales are we looking to achieve this year?
  • What will this cost, in terms of product costs, selling, general and administration costs?

Bottom up forecasting means starting at the base and working up.

Likely questions for this method of forecasting are:

  • How many leads do you expect your marketing efforts to generate?
  • What will your average conversion rate be?
  • What will the average dollar sale be?
  • What are your expenses likely to be?

Bottom up forecasting is a lot more likely to forecast where the business is going and gives a robust set of assumptions that can be tested and modified throughout the year.  Top down tends to provide more of an optimistic view however both are useful in the forecasting process.