Forecasting sales is vital to all business. Far from being just guesswork, it is a scientific technique that predicts future sales by analyzing past and current sales trends and the variables that affect it. However, since forecasts are often wrong, many people tend to downgrade its worth. This betrays a gross ignorance of the role of forecasting in guiding the business.
A sales forecast is important as it helps a business move forward. It does not only analyze your present business condition, but also allows you to make a comparison with a related business. If the industry is growing at 15% rate increase, it is wise or prudent to forecast your sales to be at par with the norms. In this case growing at 10 percent may be considered a failure.
Your sales projections may be affected in different ways. Internally a sales forecast may be affected by labor problems, shortage in production capacity, and lack of working capital. But it can be also affected externally by factors like seasonality of your product, increase in competition, inflation, and events like sudden political unrest.
To arrive at an accurate sales forecast, you must have the correct figures of your monthly sales performances during the previous years of your operations. From there, you can make an estimate of your sales on a monthly basis. It is essential to have a monthly sales forecast to see the different cycles, trends, or variations in your sales, to become more realistic in predicting your target. Out of this, you can now make your quarter and annual sales forecast.
A business person must decide based on facts and numbers, and not on hunches or gut feel. Your records should be accurate, so you can come up with a good sales forecast. If you have several products, make sure you make a different projection for each one. Some make a mistake by making a collective target. Be realistic, by identifying which products are saleable, and which are slow moving.
Here are reasons why you should make a sales forecast.
- It helps you establish your rules and guidelines. You will know when to increase inventories, and enables you to plan your production considering your capacity. It helps also in making decision as regards scheduling procurement and staffing.
- It helps in determining how to allocate company budget. If you predict there will be an increase in production, you will be able to allocate sufficient funds for purchasing or added equipment. This would also save you from overstocking if you think sales will be low.
- It shows the future direction of the company. Through your sales forecast you will easily know if the future of your company is good or bleak. It also helps determine your ROI.
But what if your firm is new in the business? Still sales forecasting must be done, so you would know the viability of your business. You may do this by surveying your current market and competition. Know how your competitors fare. For a start, you can estimate your monthly sales based on the average monthly sale of a similar-sized competitor. With this in mind, you have to make a research on how your competitor works. Analyze the competitor’s staffing, pricing, customer volume, operation hours, and promotional activities. From there, you can approximate figures, so you can make your own sales forecast.
A sales forecast may not be 100% accurate, but it is still is an essential guide in organizing your business. You should plan this carefully, or else it will have a negative impact to your business. You have to make solid projections, so you would know how you can effectively compete with the market. Regularly check your estimates to determine if you are meeting your goals. Be willing to take corrective actions.
Gather data accurately, so you would not be misled. Also be able to make a realistic forecast. Problems arise not only in too high projections, but also when they are too low. If your forecast is too high, this may result to unnecessary increase in inventories and sudden decrease in cash flow. On the other hand, if you have low forecast, this may result to low workforce performance and or shortage in profit due to unavailability of supplies.
Forecasting sales is difficult, but it can be done by understanding the status of your present business. Talk with your accountant, financial adviser, sales manager or any other person that can contribute useful information. Use all the resources you can tap so that you can develop a realistic sales projection that can maximize the potential of your business.
Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc., www.businesscoachphil.com) All rights reserved. Posted with permission.