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
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.
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
* 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
* 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
* 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.
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