Conduct a Sales Forecast

Post on: 22 Июль, 2015 No Comment

Overview

A sales forecast is a prediction based on past sales performance and an analysis of expected market conditions. The true value in making a forecast is that it forces us to look at the future objectively. The company that takes note of the past stays aware of the present and precisely analyzes that information to see into the future.

Conducting a sales forecast will provide your business with an evaluation of past and current sales levels and annual growth, and allow you to compare your company to industry norms. It will also help you establish your policies so that you easily can monitor your prices and operating costs to guarantee profits, and make you aware of minor problems before they become major problems.

After reading this article, you should understand:

The importance of sales forecasting
The different methods used to create sales forecasts
How often you should forecast
What you need to prepare a sales forecast
Where to go to collect the information to produce a sales forecast
What factors will affect sales

I. The Importance of Sales Forecasting

Sales forecasting is a self-assessment tool for a company. You have to keep taking the pulse of your company to know how healthy it is. A sales forecast reports, graphs and analyzes the pulse of your business. It can make the difference between just surviving and being highly successful in business. It is a vital cornerstone of a company’s budget. The future direction of the company may rest on the accuracy of your sales forecasting.

Companies that implement accurate sales forecasting processes realize important benefits such as:

Enhanced cash flow
Knowing when and how much to buy
In-depth knowledge of customers and the products they order
The ability to plan for production and capacity
The ability to identify the pattern or trend of sales
Determine the value of a business above the value of its current assets
Ability to determine the expected return on investment (This can be very helpful if the company is trying to obtain financing from investors or other lending institutions)

The combination of these benefits may result in:

Increased revenue
Increased customer retention
Decreased costs
Increased efficiency

For sales forecasting to be valuable to your business, it must not be treated as an isolated exercise. Rather, it must be integrated into all facets of your organization.

II. What Information Is Needed to Prepare a Sales Forecast?

Since the forecast is based on your company’s previous sales, it is necessary to know your dollar sales volume for the past several years. To complete a thorough sales forecast, you also need to take into consideration all of the elements, both internal and external, that can affect sales.

Mathematically, it is possible to forecast sales with some precision. Realistically, however, this precision can be dulled because of external market and economic factors that are beyond your control. The following are some of the external factors that can affect sales:

Seasonality of the business
Relative state of the economy
Direct and indirect competition
Political events
Styles or fashions
Consumer earnings
Population changes
Weather
Productivity changes

Sales forecasting requires sufficiently detailed analysis of both the external and internal factors related to the sales function. Internal factors that can affect sales are somewhat more controllable, such as:

Labor problems
Credit policy changes
Sales motivation plans
Inventory shortages
Working capital shortage
Price changes
Change in distribution method
Production capability shortage
New product lines

The sales forecast must be qualified by asking the following questions:

What are the items to be forecasted (individual product lines or business units)?
How far in the future should the forecast extend?
How frequently should the forecast be made?
How frequently should the forecast be reviewed?
What would constitute an acceptable tolerance of forecast error?

The following internal data will be scrutinized and analyzed when conducting a sales forecast. Therefore, this data must be prepared on a consistent basis:

Accounting records
Financial statements
Sales-call reports
After-sales service demands from clients

It is significant to note that if you sell more than one type of product or service, you should prepare a separate sales forecast for each service or product group. The more focused your sales forecast is, the more precise its outcome will be.

III. How Long and How Often Should One Forecast?

A sales forecast needs to be performed, reviewed and compared with actual performance results on a regular basis. Think of it as a routine tune-up that keeps the gears of your business running smoothly so your company can achieve a higher performance record.

Although every business owner’s comfort level may be different, sales forecasts should be conducted monthly during the first year, and quarterly after that. The more often you forecast, the better your chances of weeding out extreme variations in year-to-year sales. It will also possibly identify a trend or level of variations that is more realistically oriented to probable future sales patterns.

Although any forecast has a percentage of uncertainty, the farther into the future you project, the greater your uncertainty. As a rule, there are three lengths of time for sales forecasting:

Short-range forecasts are for fewer than three months. They are used to make continual decisions about planning, scheduling, inventory and staffing in production, procurement and logistics activities.
Intermediate forecasts have a span of three months to two years. They are used for budgetary planning, cost control, marketing new products, sales force compensation plans, facility planning, capacity planning and process selection and distribution planning.
Long-range forecasts cover more than two years. They are used to decide whether to enter new markets, develop new products or services, expand or create new facilities, or arrange long-term procurement contracts.

Perhaps the simplest method is to assume that the percentage increase (or decrease) in sales will continue and that no market factors will influence sales performance more in the future than in the past.

IV. Forecasting Techniques

Sales forecasting isn’t that difficult. In fact, even if you’ve never conducted a formal, written forecast, you’ve probably used at least some sort of informal method, whether you know it or not. To prove this point, answer the following questions.

Have you ever questioned your inventory requirements?

Yes No

Have you ever checked that there were sufficient salespeople to cover all territories?

Yes No

Have you ever questioned your total sales?

Yes No

Have you ever checked what volume has been achieved with a specific customer?

Yes No

Have you ever analyzed what causes a slump or jump in sales in a particular region?

If you answered Yes to any of these questions, you’ve conducted an informal sales forecast.

There are two main approaches to sales forecasting: quantitative and qualitative, or judgmental. Often companies utilize both methods at the same time.

Simply stated the word quantitative means estimating a particular, indefinite or considerable amount of anything. Quantitative techniques rely primarily on numbers to conclude forecasts. These numbers are multiplied, added or correlated and then placed in a formula to predict the company’s sales. You can start by building up to aggregate totals of market demand, or start with these totals and work the numbers down into more focused forecasts for individual products. Quantitative techniques are calculated from important numbers such as sales volume, gross national product, disposable income, and total number of buyers in the market. These numbers have been shown to have significant value in forecasting.

If demand for your product is highly stable and predictable, the forecast consists of past sales and inflation to predict future sales. In formula form, it is simply: Past Sales + Percentage of Inflation Factor = Sales Forecast

Monthly Forecasts

In the event that monthly variations over a period of years have been small, another method of forecasting can be based on the distribution of sales by months.

Suppose, for instance, that a short-term forecast is being made for the month of October. For the past several years, sales in October have totaled 12.5 percent of annual sales. During the same period, August sales have averaged 10 percent of annual sales. Sales during the previous August were $16,000. $16,000 / .10 = $160,000 (estimated annual sales)

Projected sales for October will be 12.5 percent of $160,000 (or $20,000). Sales for other months can be forecast in the same way.

Next Step: Compute Your Monthly Sales Forecast (Qualitative Method)

(Remember that if you sell more than one product or service, you’ll need to prepare a separate forecast for each line and combine them to get a company-wide forecast.)