Introduction

A new year offers a natural opportunity to pause and reflect on the events of the past twelve months. It is a time to celebrate what went well, identify what did not go as planned, and take those lessons forward. For business owners, this reflection should go beyond day-to-day operations and focus squarely on the future. One of the most valuable exercises you can undertake at the start of a new year is building a thoughtful and realistic sales forecast. Doing so creates a strong foundation for decision-making and positions your business to start 2026 with clarity, confidence, and purpose.
Sales forecasting is not about guessing. It is about using data, experience, and informed assumptions to map out where your business is headed. When done correctly, forecasting allows you to anticipate challenges, capitalize on opportunities, and grow intentionally rather than reactively.

What is Sales Forecasting?

A sales forecast is an educated prediction of sales revenue for a specific period of time. Similar to how a weather forecast is made using historical data and environmental trends, a sales forecast makes use of your past sales, economic trends, and other current financial factors within your company. Using this forecast, you can prepare for anticipated challenges, allocate your budget efficiently, and avoid unnecessary debts.

Why Forecast?

Forecasting serves as the baseline for any successful business. Knowledge is power, and having a reasonable estimate of future revenue gives you the ability to plan rather than scramble. When you understand how much money you can expect to bring in over the coming year, you can make informed decisions about hiring, inventory, equipment purchases, pricing, and expansion.

Let’s take a look at two business owners: They both have been around for three years and both work in the blanket making business selling the softest blankets you’ve ever felt.

Business A does not create a sales forecast. The owner believes they know the business well enough and sees forecasting as an unnecessary exercise. Throughout the year, revenue fluctuates dramatically. During the first few months, cash piles up, but there is no clear plan for how to use it. Eventually, in June, the owner decides to purchase five new machines. By July, however, payroll becomes difficult to meet because of the large upfront expense. The business is forced to take out a high-interest loan to cover operating costs. When winter arrives, their busiest season, the company struggles to purchase enough materials because loan payments and interest are cutting into profits.

Business B, on the other hand, takes the time to forecast sales for the upcoming year. By analyzing historical data, the owner recognizes clear seasonality. The forecast shows strong cash flow early in the year and slower sales during the summer months. With this insight, the business invests in three new machines instead of five, leaving enough cash on hand to comfortably cover payroll during slower periods. When winter demand increases, the additional capacity allows the business to meet customer needs, increase profit margins, and reinvest without relying on debt. All profits stay within the business rather than being lost to interest payments.

Where to start

To understand the future, you need to take a look at your past. Although past results don’t always guarantee future results, it is necessary to understand why you got the results you did in the past. A few key places to begin your forecast are:

1. Sales Mix – Start by examining your product or service offerings. What product lines do you have and what is your profit margin on those products? Do you have a product that is losing money? Do you have products that are sold together and compliment each other? Which products are increasing revenue and by how much year over year? Understanding your sales mix helps ensure that growth is driven by profitability, not just volume.
2. Economic Forecast – Next, consider outside factors that could affect your business. Is your industry growing or contracting? Are there new innovations that could make your products obsolete or more effective? Are you a new product that is starting to reach an inflection point in the market where you will need to upgrade capacity? How easy is it for competitors to enter your business? Are tariffs increasing for you because you source materials or products outside the U.S? Are there new regulations that will increase compliance cost?
3. Internal Rate of Return – What is your company’s internal rate of return expected for your product lines? Are costs increasing internally due to the naturally growth of your business or are there large one time expenses occurring more frequently than expected? Is the cost of materials increasing to the point of needing to find new vendors? Do you plan on passing on price increases to your customers or are you going to absorb the costs because your customers are price sensitive?

All of these questions are meant to help guide your thinking with profitability at the forefront. What goes into the business is equally as important as what comes out of your business.

Factors to Consider

When coming up with your sales forecast there are a plethora of business considerations to take into account.

• Outliers – There are a lot of ordinary costs that you will expect to incur such as rent, utilities, materials, and cost of labor to name a few. However, the ones that will get your business into trouble are the outliers. Look at your past transactions and see if there are any large expenses that you might be able to budget for moving forward. Perhaps you had a machine unexpectantly break down and can reasonably expect needing to buy a new one this upcoming year.
• New and Existing Clients – Looking at your attrition rate, the rate at which you lose/gain new customers, and see if you are increasing your overall customer base, staying flat, or losing overall customers. With new products, how much will you expect your customer base to grow or will the new product cannibalize one of your already existing products?
• Contracts – Do you have contracts expiring with customers or vendors? This could be a good opportunity to reassess how much you are charging/getting charged and try to get better overall rates. Every dollar that can be added to your pocket will increase the overall budget you have to grow your business. You could also use the opportunity of contract negotiation to offer your customer additional services resulting in higher margins and more interconnected relationships moving forward.

It’s important to have a plan while creating your forecast so you have a good idea of how your goals are progressing. If you need direct assistance understanding how to proceed with your sales forecast, we would be happy to help!

Common Pitfalls

As you formulate your sales forecast, there are a number of mistakes you could encounter if not careful. Here are some common issues you may face:

1. Confirmation Bias – Confirmation bias occurs when we select information that confirms what we like to see, rather than what we should see. If you are emotionally invested in a product that isn’t producing the desired numbers, it’s important to take a step back and look at it from a practical point of view.
2. Not adhering to data – While our intuition can often serve us well in many aspects of life, it is best to utilize as much data-based judgement as possible when forecasting.
3. Untempered Optimism/Pessimism – When looking back at your business’ history, take care to be pragmatic in your assessments. A single failure may not be indicative of something bigger, depending on other factors. Similarly, take care that you do not go all in on a winning strategy without making sure it is sustainable.

 

Conclusion

A well-prepared sales forecast places your business ahead of competitors who fail to plan for the year ahead. Forecasting allows you to allocate resources intentionally, avoid unnecessary debt, and invest in growth at the right time. Instead of being surprised by year-end results, you gain visibility into what lies ahead and the ability to influence those outcomes.