Sales Forecasting – Sunny with a Chance of Profit!

The future can be unpredictable. As the last two years have shown, the world can suddenly face unprecedented global events that are completely unexpected. However, in the world of business, there are things you can do to have a better understanding of the future of your company. You can even implement a sales forecasting tool to help you make predictions and thereby make plans for action. In this article, we’ll delve further into the topic of sales forecasts and why they are so essential to a successful business. With the right information, you can equip a business to weather any storms it may face profitably.

The Purpose of Sales Forecasts

Sales forecasts are primarily based on predictions of the quantity of a product that a business estimates they’re likely to sell. From that prediction, they can:

1. Work out the forecast of likely profit or loss. Profit is obviously the main goal for most businesses, and this is a vital forecast to be able to make.
2. Construct cash flow forecasts. This is a critical part of business planning. By looking at sales forecasts in terms of the income, that’s going to be the biggest cash inflow for any business. This knowledge is going to help them to go on to construct all the rest of their cash flow forecast.
3. Organise staffing and create human resource plans. The more sales businesses are expecting to make, the more staff that are going to be needed to produce that level of output.
4. Plan the required level of production. There is no benefit in having demand for a product if that can’t be met with supply. Therefore, by making forecasts for how much they are likely to be able to sell, a business can then work back and plan the required level of production to meet that demand.

Factors That Affect Sales Forecasts

There are a huge range of factors that affect the sales forecast of any business. These factors change how accurate the forecast is likely to be. Therefore, a successful business will need to be flexible and adaptable, to be able to adapt to the varying factors. Some of these factors include:

1. Consumer trends. This broad term covers a wide range of different aspects, such as demographics, buying habits and changing trends and tastes. Demographic changes will result in changes to consumers demands, as will smaller things like tastes and fashions. For example, a change in diet trends has led to a boom in plant-based food sales. In 2021, vegan food sales shot up 2.5 times faster than in the previous three years. The plant-based market is expected to grow by 18.9% by the year. This trend would mean a boost in sales for vegan product suppliers, but a decline in sales for meat product vendors.
2. Economic variables. For example, a sudden spike inflation can lead to a big rise in uncertainty which would in turn lower consumer spending as buyers are not confident about what’s happening in the future. Alternatively, if interest rates were to fall, that would reduce the amount that some consumers are going to have to pay on their mortgages. That might encourage them to spend a more on other items and cause sales to be higher than forecast.
3. Actions of competitors. If a competitor suddenly launches a huge promotional campaign or sponsors a very publicised event, this will raise their profile significantly. In this case you’re going to find that some consumers that you would have expected to buy from you are going to move across to competitors. Similarly, if your competitors cut their prices and start offering better deals, then you’re going to lose out on consumers and your sales are going to be lower than what you might have forecast originally.

Problems with Sales Forecasting

Some issues with sales forecasting arise from the way that data is collected. Extrapolation is the process of using past trends and data to predict what is going to happen in the future. This process is used as the foundation for most sales forecasts however, just because something happened before doesn’t necessarily mean it will happen again or continue to happen in the future. While extrapolation is a simple method of forecasting that requires a minimal amount of data it can prove to be unreliable due to fluctuations in historical data. Although often being a quick and cheap option for sales forecasting, it works on the assumption that past trends will continue. As previously discussed, this is highly unlikely in many competitive business environments. This method also disregards qualitative factors such as changes in tastes and fashion which, as mentioned, is an element that cannot be accurately factored into sales forecasting.

Software to Save the Day

Sales forecasting software does the hard work for you. By evaluating historical business data, the software can produce a comprehensive report of expected sales based on historic trends. The forecast analysis therefore shows sales targets against achieved sales while also highlighting potential sales. Templates are often included in sales forecasting software these templates run analysis under the available data and used these statistics to produce sales forecast reports. In most cases, users can program the templates to include assumptions which will simulate sales behaviour and market conditions so that you can include these as part of your forecasts.

In essence, forecasting is a process of evaluation. It includes self-assessment, market assessment, and self-reflection. If you want to attain an accurate forecast, you will need to include both detailed finance and business information, as well as external market conditions.

While the results of sales forecasting may not be completely without scrutiny, it can take some of the guess work out of making business decisions. Knowledge is power, and knowledge of the future enables you to make powerful decisions. With all the information provided in a sales forecast report, you will able to forge the way forward for your business so that you can achieve success.