A good result is obtained by those who set the appropriate “bar” and strive to achieve it. This rule also applies to businesses. To get the desired profit, you need to predict the financial future of the project and take steps to improve it. The forecast should be the basis of all plans. There are many, both simple and rather complex methods of sales forecasting. We propose to understand this topic in more detail.
How is a forecast different from a plan?
Forecast and sales plan are not identical, although closely related concepts. These are different controls that have their own characteristics.
Plan – a range of tasks set by management for a department or each employee. It usually contains targets for profit and sales. Managers should be guided by them in the process of work, selecting the most effective tools for achieving the goal.
Forecast – a probable situation that may occur in the future. Forecasts are based on a certain base but are never 100% accurate. They give an idea of how much product, for how much, and with what profitability it is likely to be sold. This is not an axiom, but just an assumption about the prospects for the near or distant future of business, an attempt to track the dynamics of indicators. But it is sound sales judgments that help optimize planning.
Differences between plans, forecasts and hypotheses
- is the company’s strategy;
- concerns global goals;
- is formed taking into account forecasts;
- is of a normative nature;
- assumes a unique solution;
- has clearly defined intervals;
- uses precise quantitative methods;
- serves as a reference point from which it is impossible to deviate;
- it happens short-, medium- and long-term;
- its implementation can be influenced directly and indirectly;
- Employees are responsible for meeting targets.
- this is a company tactic;
- concerns applied tasks;
- is probabilistic;
- depends on a large number of internal and external factors;
- has alternative, variant content;
- uses qualitative methods;
- depends on many variables that are almost impossible to influence;
- is made more often for a short period of time;
- If the predicted situation does not come true, no one is responsible.
Both plans and forecasts are an integral part of doing business. These elements complement each other at the stage of activity regulation. One of them is a mandatory roadmap, the second is a look into the future based on available objective data and dynamic trends.
Why forecast sales?
Many will think: “Why engage in fortune-telling and predictions that may not come true? After all, business loves accuracy. I’ll just make a plan, appoint responsible executors, give them instructions and let them achieve their goals.”
In fact, assumptions are also important and to some extent affect the operation of the company . For example, if losses are predicted for the coming months, management is looking in advance for ways to cut costs and expand sources of income.
Forecasts are both positive and negative.
Given the various scenarios for the development of events, entrepreneurs can draw up the most effective work schedule, share responsibility and increase the likelihood of fulfilling the plan.
Forecasting is necessary for:
- setting goals – increasing income, increasing the number of transactions, getting ahead of competitors;
- calculation of resources, during which it becomes clear how many employees, what technical equipment will be required to achieve the set goals;
- inventory management, excluding situations with a probable shortage or excess of goods;
- ensuring mobility – timely redirection of efforts for the period of seasonal rise or fall in sales;
- prompt intervention in the process and correction of actions in case of subsidence of indicators.
Let’s give some examples.
The online store sells garden tools – a product with a pronounced seasonality. The emphasis on the main product is from March to July. During this period, the company purchases a maximum of inventory, carries out active promotion. The rest of the time, the assortment profile is slightly shifted. In winter, snow-removing equipment, goods for winter fishing, sleds are sold. Forecasts based on last year’s experience help maintain a stable income throughout the year.
The online store filled the warehouse with fans. Due to the fact that the summer turned out to be not hot, there was an excess of goods in the warehouse . This resulted in costs and lost profits.
The company purchased insufficient snow shovels, counting on a normal average winter. The weather this season turned out to be very snowy, there was a high demand. Applications from customers continued to arrive, even when the warehouses were empty. As a result – dissatisfied customers and lost profits .
The second and third situations are a clear example of the need for flexible forecasting based on advance weather forecasts. This is especially important for seasonal businesses dependent on weather conditions.
In general, sales forecasting is a complex process that affects almost all departments of the company . It takes into account trends and trends in the market sector, customer needs, the internal situation in the company, real opportunities in terms of procurement and logistics.
The procedure will be helpful:
- stationary retail outlets, online stores and all firms that are engaged in active sales – to calculate the projected sales volumes;
- company management – for planning activities and profits;
- heads of sales departments and sales specialists – to build clear criteria for work;
- marketers – to build plans for the launch of new products and maintain existing ones;
- warehouse employees – for the implementation and coordination of activities.
Basic Sales Forecasting Methods
Consider the forecasting methods that are most often used in practice.
The forecast based on the method of expert assessments is taken from the point of view of one or more professionals in the industry. Regardless of whether it is an individual assessment or a collective assessment, the opinion must be supported by relevant qualifications, practical and scientific experience.
The method works as follows:
- Choosing an object for evaluation (you can analyze not only the sales volume of a particular product, but also other important business parameters).
- Definition of parameters for comparison.
- Sort values by importance.
- Scale comparison.
The organization of the process is carried out by special working groups that conduct surveys, process and analyze the collected information. At the same time, statistics, opinions of analysts and experts that are publicly available are used. Large companies order marketing research, which results in a carefully crafted, updated sales forecast.
Let’s analyze the most banal example of applying the method. The online store sells alcoholic beverages. According to professional analysts, this market niche is expected to shrink by 14% this year. Based on these data, management draws conclusions about the immediate prospects for business development. The probable drop in sales is calculated at about the same level – about 14%.
Applying the method of expert assessments, one must understand that opinion, especially individual, is subjective. The forecasts made can have a fairly high percentage of error.
Time series analysis
According to this method , the sales volume is forecast based on the results of work for the previous reporting periods . The calculations take into account the data for the last year by months. If the company is young and there is no such information yet, it is better to focus on other parameters. For example, general niche and market trends, competitors’ activities.
Time series analysis is carried out using a pivot table in Excel . It is divided into several columns:
- sales volumes;
The second column contains the actual volume of sales for each month of the last year, the third – the percentage of growth. To calculate growth, you need to divide the parameter of the current month by the figure recorded in the previous one, and convert the result into a percentage. Then the average growth value is displayed. For example, for the year the figure was 7%. Forecasts for each period of the following year are made taking this figure into account.
The results of calculations using the time series analysis method are shown in the table:
If an online store is experiencing some difficulties, is influenced by seasonal changes, this should be taken into account in the forecast. The decline in sales growth will be noticeable in terms of indicators that fall below the 100% mark. With seasonal declines, an individual adjustment of the plan will be required. In this case, it is convenient to build a graph that clearly reflects sales volumes in monetary terms by months. Using it, you can easily track the trend and interpret it for the next period.
Compared to the expert method, time series analysis is considered to be more detailed and accurate .
When building forecasts using casual methods , a number of factors are taken into account that can affect sales:
- inflation rate;
- seasonal factor;
- economic and political situation in the region, country, world;
- features of the tax system;
- recent changes in legislation;
- bank interest on loans, the discount rate of the central bank, and so on.
Global factors affect the entire market sector and each individual store. Sometimes their influence is not direct, it affects after a certain period of time. For example, lowering the rate makes loans more affordable for consumers. This leads to an increase in demand in some niches. When inflation rises, demand, on the contrary, decreases.
However, not all events affect business development unequivocally. For this type of forecasting, professional training is needed. Ideally, it is better to involve an experienced expert or an analytical agency in this responsible task.
In addition to those discussed in the review, there are more complex forecasting tools:
- balance and normative methods;
- economic analysis.
Tips for Making Forecasts
Qualitative forecasting is possible subject to several rules:
- Clear time frames. Forecast sales for a specific period in accordance with long-term or short-term goals. Forecasts are made for each month, quarter, year, several years ahead.
- Accurate numbers and parameters. Use reliable sales data for previous periods of store activity. Be aware of possible seasonal fluctuations.
- Regular adjustments. Be sure to make adjustments to the forecasts based on actual sales, current market changes. The forecasts are affected by the increase in the client base, the expansion of the company and other additional circumstances.
- The correct correlation with the pricing policy of the market. Do periodic niche research. If necessary, adjust the prices of goods/services.
To get the most accurate and realistic forecasts, it is worth using automated accounting systems. They help manage the work of the company and optimize key business processes.
It keeps a record of all the important data that is needed to make forecasts for the near future and further stages of business development. Key indicators for different periods of work are reflected in the “Analytics” section.
- average check;
- the number of sales;
- cost price;
- Sales leaders;
- trade turnover.
The functions of the program are not limited to analytics. The tool allows you to manage inventory, monitor the work of employees, track balances, and form orders to suppliers. To send and print checks, you can connect an online cash register.
Forecasting is an effective way to determine the right approach to business development, and supplement regulations and guidelines for the sales department. With a clear vision of the prospects, it is always easier to reach a new level.