Sales forecasting is a key element for any company, start-up and business plan. However, many fear this job, as it can be difficult to produce an accurate forecast.
First of all, why should you bother with forecasting sales after you submitted your business plan? If you don’t have to do it anymore, why should you?
Well, sales forecasting is a key element in conducting business. Big companies swear by forecasting reports and often have entire departments dedicated to planning, econometric models, customer polls, sales pipelines, quotas, and commitments. But when it comes to smaller SME’s that don’t have the capacity to create entire departments for sales predictions, it can be harder to make a single person do it.
However, a good forecast can help you develop and improve your strategic and operational plans and increase your knowledge of the marketplace. Therefore, a sales forecast is an essential tool for managing a business of any size. Month-by-month forecasts provide best and the most accurate results, but many businesses tend to draw up sales forecasts once a year for more flexible predictions.
Accurate forecasts can help a business to avoid unforeseen cash flow problems and manage your production, staff and financing needs more effectively. While it’s always wise to expect the unexpected, a well-constructed sales plan, combined with accurate sales forecasting, can allow you to spend more time developing your business rather than responding to day-to-day developments. However, there are many sales forecasting pitfalls that could disturb your path to success, here is how to avoid them:
Avoiding sales forecasting pitfalls
While sales forecasts can lead your business to a better future, here are some common sales forecasting pitfalls that businesses endure:
We always want the best outcome! While it is a great idea to look at back at the previous year’s forecast to see if your figures are realistic, that might not show a full picture of the future.
Using historical data to project the future without looking at the makeup of that data will likely produce inaccurate results, or it will produce a report that does not account for market flexibility.
Whereas, for example, by examining the relationship, of price, stock days and sales volumes, the effect of economic changes can be modeled enabling management to strategically plan for the widest range of outcomes.
Make sure your sales assumptions are linked to the detailed sales forecast, otherwise you can end up with completely contradictory information. Additionally, new businesses should avoid the mistake of working out the level of sales they need for the business to be viable, then be putting this figure in as the forecast.
In the case of new businesses and most SME’s the weakest link remains the lack of understanding surrounding the effect of the fundamental business drivers. Business forecasting became a top priority for banks in assessing the business prospects of both new and existing clients. In times of tight credit, the difficulties in raising funding for new and existing businesses have become even more exacerbated. Consequently, a detailed business forecast is now a necessity in the search, to both maintain and secure sufficient lines of credit. The lack of a good understanding of business trends adds unnecessary cost, can put reputation on the line and, in the worst case, even jeopardise a company’s future.
It is vital to prepare and research all of the information that you need to create a sales forecast.
Don’t overcomplicate everything
While there are plenty of times where you need to drill down into a lot of detail about your sales and your forecasts will have to look into all of the nuances of the product. However, some drill down forecasts can go into too much detail, so that entire stock files are modeled, creating a micro model, which can be too difficult to interpret.
Focusing on product groups will enable the effects of changes in product mixes and allow changes in pricing to be “What If” tested. For example, looking at what would a bargain by forecasting how many bottles of Moet Chandon are sold versus Veuve Clicquot? Whereas the benefit of modeling the potential change in margins by the increase in sales of Spirits vs. Champagnes is substantial. You can use our financial forecasting software for sales forecasting.
Armed with this information you can rapidly identify problems and opportunities in your forecast – and do something about them!