Sales forecasting is the prediction of future performance based on available information about past performance.
This forecast is done for a particular period of a time in the near future, usually the next fiscal year. Sales forecasting is easier for established companies that have been operating for a few years than for newer companies. Businesses that use sales forecasting tend to perform better than those that don’t.
Sales planning and forecasting are extremely important processes for any company, because they form the basis for allocating resources.
When your sales reps make their forecasts, they are also planning their future activities, providing each of them with a business plan for managing their territory. Assuming that each of them has a proportion to fill, forecasting is the tool that helps them identify the customers to meet their objectives.
The sales forecast is the best tool to get a good estimate of the demand for the products you sell. The sales team is the front line for your business and best positioned to gather information about expected demand.
With accurate sales forecasting, you can achieve a higher rate of on time in full, or OTIF, delivery. The information from sales forecasts guarantees that sufficient product will be manufactured or ordered to service customers on a timely basis, resulting in happier customers and fewer complaints.
The more accurate the sales forecast, the better prepared your company will be to manage its inventory. This is by avoiding both overstock and stock-out situations. Stable inventory also means better management of your production.
When you can predict demand and manage production more efficiently, you also have better control over your supply chain. This affords you the opportunities to manage resources and take full advantage of just-it-time ordering.
Anticipating sales gives you the information you need to predict revenue and profit. Having good forecasting information at your disposal also gives you the ability to explore possibilities to increase both revenue and net income.
Having an idea on the projected production rates for your business makes it possible for you to have better control of your internal operations. By anticipating future sales you can make decisions about hiring – permanent or temporary – marketing and expansion.
Continuous improvement is a goal of many if not most businesses. By forecasting sales and continually revising the process to improve the accuracy, you can improve all aspects of your business performance.
With solid forecasting, the good levels of inventories that you maintain will prevent the need for panic sales to rid your business of excess merchandise. Sales may be managed on a thoughtful planned basis.
Sales forecasting gives marketing an advanced look at future sales and offers the opportunity to schedule promotions if it appears sales will be weak. In extreme cases, sales forecasts may lead to discontinuing slow-moving products.
Knowing whether your revenues are likely to grow or shrink in coming months keeps you from spending at a time when you should be conserving cash to survive a recession. It also allows you to take advantage of special deals or expansion opportunities that come along, knowing you will have enough cash to support your business.
Having a good idea of future revenues and where they will be generated in your business allows you to plan the best way to take advantage of future changes in the economy. Uncertainty is a roadblock to besting your competition by expanding at just the right moment. Detailed and deep research into the economy, customer buying trends, new products and your company’s past revenue production experience creates a reliable sales forecast that provides a strong basis for your future planning.
Cost of Sales
Cost of sales refers to how much you are spending on products or components for each sale you make. This is really the core of sales forecasting. By predicting sales patterns, you can more accurately plan for what products or components you need. You definitely don’t want to miss an opportunity by running out of materials during a busy season and having to scramble or pay extra to order what you need. On the other hand, you don’t want to overstock and have products go bad or have to recoup your expenses over a long, drawn-out period. Sales forecasting allows you to make informed decisions about what you need, how much you need and when you need it.
Sales forecasting helps you manage your staffing needs, keep scheduling in order and maintain an open and respectful dialogue with your employees. This allows you to be more organized and minimize time spent on scheduling. it also improves your relationship with your staff: You can allow for the scheduling needs of your employees and be able to give ample notice when you expect to cut or expand employee hours.
Detailed sales forecasting should help you develop the strategy and character of your advertising. A sales forecast will show you how much revenue you can expect and what kind of money is available for your advertising budget. It helps you track and predict the behavior of consumers, which is the basis for successful advertising. This information can help you break into new customer bases, address unmet consumer needs and abandon or scale down trends that are on the wane.
Classification of forecasting
Short-term forecasts are usually made for tactical reasons that include production planning and control, short-term cash requirements and adjustments that need to be made for seasonal sales fluctuations. Such forecasts are for periods of less than one year, with a normal range between one and three months.
Medium-term forecasts are made for minor strategic decisions in connection with the operation of the business. They are important in the area of business budgeting for the operating budget, and it is from this forecast that company budgets are built up. Incorrect forecasting can have serious implications for the rest of the organization, for if it turns out to be over-optimistic, the organization will be left with unsold stock and will have overspent on production. This forecast is used for such matters as the staffing levels that are required to achieve expected sales, the amount of money to be spent on sales effort, and short-term capital requirements for such items as machines to be purchased to meet increased production. The time period for a medium-term forecast is normally one year.
Long-term forecasts are for major strategic decisions to be taken within an organization, and they very much relate to resource implications. They deal with general rather than specific items, and rely more heavily in their computation upon such factors as government policy, social change and technological change. They are, therefore, concerned more with general trends, and in the light of these trends, attempt to predict sales over periods greater than two years. In some strategic, heavily capitalized industries, predictions might be needed for a decade or more. The problem is that for these lengths of time the forecast cannot be more than vague, and planners in retrospect blame the forecast when things go wrong and forecasting thus receives criticism.