Methods of calculating monthly sales
In order to optimize business processes and to obtain the best possible turnover, every company must forecast its sales of products or services. The more a company invests in continuously improving its sales forecasts, the more likely it is to increase its market share.
However, for most companies, sales are not consistent throughout the year: they are subject to seasonal variations. Each week, month or quarter of the year will have its own weight of sales. These variations can then be measured through the calculation of seasonal coefficients, to predict future monthly sales.
Why calculate forecasted sales on a monthly basis?
Throughout the year, a company's sales volume and the resulting revenue fluctuate from month to month, especially in the retail sector. These fluctuations can often be explained by factors external to the company, such as changes in customer buying behavior.
Seasonal variations must therefore be analyzed as part of the sales forecast, so that the company can identify the months of the year that are most conducive to the sale of a product. In this way, it can make informed management decisions regarding its commercial actions, its purchases from suppliers, its prices, its sales force or its stock levels for each product.
The calculation of seasonal coefficients can then be necessary when the company wishes to analyze the seasonality of its sales, to find solutions allowing it to reduce the difference in turnover between a period of high activity and a period of low activity. More simply, the calculation of coefficients can simply be used to forecast monthly sales more accurately.
The basic principles of monthly sales calculations
In any case, in order to calculate the seasonal coefficients, the company must first calculate the forecasted turnover for the year (or sales volume). To do this, many forecasting methods are available (market research, moving average, average points, exponential smoothing, equation of the linear adjustment line, etc.). To forecast monthly sales, all that remains to be done is to multiply the forecasted sales for the year by the seasonal coefficient for each month. Here, we will refer to the turnover (CA) rather than the sales volume.
There are two possible methods of calculating seasonal coefficients: the average coefficient method and the proportional coefficient method. Although the coefficients calculated are different depending on the method chosen, the forecasts obtained must be identical. Given the amount of historical data, the company may calculate the coefficients based on monthly data from a single year or from several previous years. The reasoning is the same for both monthly and quarterly forecasts. In order to simplify the reading of the data useful for the calculation, the data should ideally be gathered in a table.
Calculate monthly sales with the average coefficient method
Seasonal coefficients based on the previous year
To calculate monthly sales with this first method, simply:
- calculate the total sales for the previous year;
- divide this turnover by 12 to obtain the average monthly turnover for the year;
- divide the sales of the months of the previous year by the average monthly sales to obtain the seasonal coefficient for each month;
- multiply the seasonal coefficient of each month by the estimated turnover for the coming year.
Seasonal coefficients based on several years
By taking into account several years of data, the company ensures more accurate forecasting results. With this method, one must:
- calculate the average sales for each month, year by year;
- divide the sum of these sales figures by 12 to obtain the monthly general average;
- divide the average sales for each month by the monthly average to obtain the 12 seasonal coefficients;
- multiply the total sales for the year by the seasonal coefficient for each month.
Calculate monthly sales with the proportional coefficient method
Seasonal coefficients based on the previous year
To calculate your future monthly sales with this second method, simply:
- calculate the total sales for the previous year;
- divide each month's sales by the total turnover to obtain each month's seasonal coefficient;
- multiply each month's seasonal coefficient by the projected sales for the coming year.
Seasonal coefficients based on several years
If the company has sufficient historical data to calculate coefficients based on multiple years, then it can:
- calculate the total sales for each year and then average them;
- calculate the average sales for each month, year by year;
- divide each month's average sales by the average annual sales to obtain the 12 seasonal coefficients;
- multiply the total sales for the year by the seasonal coefficient for each month.
A company that is most active in the summer months wants to calculate its monthly sales for the year 2021. It forecasts an annual turnover of 370 thousand euros. It has a turnover of 300 thousand euros in 2018, then 320 thousand euros in 2019 and finally 360 thousand euros in 2020. Its average turnover over the last three years is therefore about 326 thousand euros.
Then, it calculates its average monthly turnover, among which:
- 15 thousand euros in January;
- 25 thousand euros in May;
- 40 thousand euros in June;
- 65 thousand euros in July;
- 65 thousand euros in August;
- 15 thousand euros in October.
By multiplying these coefficients by 370 (the forecasted sales for the year 2021), she can forecast her monthly sales. In January 2021, it will potentially achieve a turnover of about 17 thousand euros, while in July 2021 it will be about 74 thousand euros.
The company has a strong seasonality of sales. The months in which the seasonal coefficient is greater than 1 are the months of the year when the company will sell the most. On the other hand, the months for which this coefficient is less than 1 are the months when the company will experience a drop in sales.
The analysis of the coefficients thus makes it possible to estimate the seasonality of the company's sales. The further apart the seasonal coefficients are from 1, the more seasonal the company's activity is considered to be, and the more the monthly sales figures will vary from one month to the next.
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