Many business owners are faced with a puzzle of not knowing how to forecast sales in these uncertain times. Sales forecasting is the typical starting procedure for the beginning of each year or when just starting a business. It is a tricky but important process.
Sales forecasting implies the prediction of future sales. Every manufacturer has an estimate of the sales that will likely occur in the near future. It provides focus and direction to the activities of a business enterprise. Sales forecast provides grounds for a company to manage its workforce, cash flow, and resources, such as whether a business needs to conserve cash aggressively or continue current operations as usual.
Well-calculated sales forecasts allow companies to make informed business decisions and guide short-term and long-term performance. Forecasts typically can be based on past sales data (easier for mature companies to base sales forecast on years of past business numbers), industry-wide comparisons (helpful for new and start-up companies), and economic trends and market research.
Sales forecasting is an important function that enables companies to:
Additionally, a sales forecast is a powerful motivation tool.
For instance, in order to track if your team hits the targets, you can keep updates of your quarterly sales forecast. Besides, as a business owner, you could also create a forecast every day for an individual sales rep on a performance plan to make sure he’s not falling behind.
Perform several sales forecasts when starting a business:
When starting a business, it is hard to predict how well your business will perform, so it is recommended to draft several options, as in run best case (one with strong results), base case (middle one) and worst case scenario (with really soft sales). This will allow you to be prepared for all possibilities. Working through the scenarios will teach you a lot.
Sales Forecasting Methods
No sales forecasting method is perfect and equal, they all have its advantages and disadvantages.
Here are a few of the most common ways to forecast sales.
This is quite a conventional and simple approach to sales forecasting, which resorts to the opinions of the top executives of the company. The executives will assess the past performance of the business, the present market conditions and the future trend before arriving at a conclusion.
The result will depend on their expertise, with both the solution at hand and with customers, as well as the likelihood of them offering reliable information.
This approach implies asking your customers directly and ascertaining their requirements in the near future. This method is particularly advisable for industrial procurements and sales, as there is a limited number of buyers and their contacts are available. In the case of consumer products, only sample approach is possible, as the number of buyers is higher.
Trend analysis is a statistical tool that includes planning future sales by looking back at past sales performance for a particular month, quarter, or even year, and using it to estimate for a future time period. To do this accurately, it is important to compare two respective time periods. Be mindful of such factors such as seasonality and buyer demand fluctuations which can explain huge swings in numbers.
Firstly, you review your historical sales data, secondly, you factor in any influences that could potentially affect the numbers, such as changes in personnel, new locations, or the increased number of new entrants in the market. You need to adjust your forecasting respectively if any factors will result in higher or lower sales.
Historical method is only available for existing established businesses. Hence if the historical data doesn’t exist, you won’t be able to use it to forecast for the future.
Criteria of a Good Forecasting Method
With a variety of different forecasting methods, expensive and cheap, flexible and rigid, requiring skill and expertise, there is a problem for the business to choose the one that fits the best for a particular demand situation.
The main criteria for a good forecasting method are the following:
If you are at the start of opening your business, the best part of sales forecasting is that the entire process can be simplified with available software tools. There is an abundance of sales forecasting methods, ranging from basic ones that rely on intuition and expertise to advanced ones that require comprehensive algorithms, from those that are based on your historical data to those that look at your sales channels.
Whichever you choose to identify and justify the numbers, Planium Pro software can do the rest. Finance section of Planium Pro software can help your business plan the financial resources it needs to support any future activities. By estimating future revenues and expenses, every department can remain informed and make smarter decisions.
Try Planium Pro software by subscribing to a 14-day free trial!