Sales Forecasting

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.

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
* 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.

Learn about Sales Forecasting Techniques

Importance of Sales Forecasting

Sales Forecasting for a New Business

Reliable Sales Forecasting

Back to Statistical Forecasting Home Page