Every year most companies go through the annual ritual of trying to figure out what their sales revenues are likely to be. Unfortunately, some will never get a good handle on it; they'll look over the landscape and make a few assumptions based on how sales grew last year, what they think the economy "feels like" to them, and what the prevailing trends have been over the past few months. Then they'll use a "Kentucky windage" approach of putting their finger up in the air and basically guessing at what their sales will be. You can't afford to be one of those businesses.

Determining where future sales are going to come from is one of the most important things any small business should focus on - and the process usually needs a little more science and a little less art than it is given. Ending up with a meaningful sales forecast involves actively thinking through what drives customers to buy from you, how that will change during the forecast period (whether you initiate the change, or it just happens), and how your small business is going to try to shape its world. It requires actively collecting and analyzing information that will make the forecast process more accurate.

Think for a minute about the sales and marketing resources you have at your disposal - and what you pay for them; its a more substantial number than you may realize, if not in dollar terms, then at least in terms of how you spend your time and what you worry about. If you're a retailer that markets heavily, or a business with a sales force, the cost of sales and marketing is obvious to you. But, even if you're a very small business, not making a huge marketing investment and without others selling for you, you're still putting a lot of your own time and energy into developing new business channels and it's probably one of those things that you find yourself thinking about, when you wake up in the middle of the night. The real question, though, is how you allocate whatever sales and marketing resources you have available to you - are you putting them to the best use?

The most productive way to approach sales forecasting is to look at three distinct groups that you can sell to - existing customers, prospective customers, and "the market" as a whole. The biggest potential usually lies in getting repeat or incremental business from customers that you have sold to before; prospects are those that you have some contact with in the past, but have not sold to, and "the market," of course, is everyone else that you might sell to, but have never had any contact with. Specifically think about how much business you can get from each of these groups next year and what portion of your sales and marketing resources, as well as your own time you are going to allocate to each group. Assume, for example, that 60% of your sales come from existing customers, 30% from prospects that you have been in contact with before, and 10% from "the market" that you have never been in touch with. Is that the way you are allocating your sales and marketing investment? If it isnt, you might want to ask yourself why.

Any business, regardless of industry, or size, can adopt this "customer / prospect / market" approach for estimating future sales. A professional services company, for example, can start with an estimate of repeat business from existing customers and then estimate how it's non-billable hours will be used to develop additional business and what its "sales / non-billable hour" ratio will end up being. This will help you think through how many incremental "deals" you need and the average size of these individual contracts, or sales, to realize your overall sales target. A manufacturer, or a wholesaler with a sales force, can start with a similar estimate of repeat business from existing customers and then determine how many new customers, at what contract size need to be added to make up the difference between repeat business and the overall sales goal.

Retailers can essentially pull three levers to push their sales higher - average sale amount, number of customers, and frequency of purchases. Their sales forecasting job is sometimes a little more complicated, because of the large number of customers they service and the information needs they have. However, they can still take a similar approach. It's harder for retailers to differentiate between prospects they may have touched and the "market" they haven't, but they can track and estimate the repeat business potential and the incremental / new customer needs to reach a particular sales goal. They can also focus on how the product sales mix plays into their sales forecast and how they should apply their marketing resources to achieve interim sales goals, such as number, frequency, and amounts of purchases.

In all of these cases, though, and for every type of business, the "customer / prospect / market" approach can be the basis of an improved sales forecast. It is a little more difficult and it does require more information and tracking. But, to the extent your small business can adopt this approach, it will realize at least two benefits. First, your sales forecasting will be inherently more accurate and meaningful. It's based on trying to assess the factors that directly influence sales, not on guesswork. And, second, it forces you to take a far more strategic approach to forecasting sales. When you can tie together the capabilities of your individual business to understand, forecast, and generate sales from different customer and market groups, with the direction the overall market is heading and the factors driving that, you're doing some pretty good strategic thinking.