The Importance of Sales Forecasting 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: 1. Enhanced cash flow 2. Knowing when and how much to buy 3. In-depth knowledge of customers and the products they order 4. The ability to plan for production and capacity 5. The ability to identify the pattern or trend of sales 6. Determine the value of a business above the value of its current assets 7. 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. Back to Outline II. What Information Is Needed to Prepare a Sales Forecast? 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: 1. What are the items to be forecasted (individual product lines or business units)? 2. How far in the future should the forecast extend? 3. How frequently should the forecast be made? 4. How frequently should the forecast be reviewed? 5. 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: 1. Accounting records 2. Financial statements 3. Sales-call reports 4. 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. Back to Outline III. How Long and How Often Should One Forecast? A sales forecast needs to be performed, reviewed and compared with actual performance results on a regular basis. Think of it as a routine tune-up that keeps the gears of your business running smoothly so your company can achieve a higher performance record. Although every business owner's comfort level may be different, sales forecasts should be conducted monthly during the first year, and quarterly after that. The more often you forecast, the better your chances of weeding out extreme variations in year-to-year sales. It will also possibly identify a trend or level of variations that is more realistically oriented to probable future sales patterns. Although any forecast has a percentage of uncertainty, the farther into the future you project, the greater your uncertainty. As a rule, there are three lengths of time for sales forecasting: 1. Short-range forecasts are for fewer than three months. They are used to make continual decisions about planning, scheduling, inventory and staffing in production, procurement and logistics activities.

2. Intermediate forecasts have a span of three months to two years. They are used for budgetary planning, cost control, marketing new products, sales force compensation plans, facility planning, capacity planning and process selection and distribution planning. 3. Long-range forecasts cover more than two years. They are used to decide whether to enter new markets, develop new products or services, expand or create new facilities, or arrange long-term procurement contracts. Perhaps the simplest method is to assume that the percentage increase (or decrease) in sales will continue and that no market factors will influence sales performance more in the future than in the past. Back to Outline IV. Forecasting Techniques Sales forecasting isn't that difficult. In fact, even if you've never conducted a formal, written forecast, you've probably used at least some sort of informal method, whether you know it or not. To prove this point, answer the following questions.
Top of Form

1. Have you ever questioned your inventory requirements?

2.
Yes No

3. Have you ever checked that there were sufficient salespeople to cover all territories?

4.
Yes No

5. Have you ever questioned your total sales?

6.
Yes No

7. Have you ever checked what volume has been achieved with a specific customer?

8.
Yes No

9. Have you ever analyzed what causes a slump or jump in sales in a particular region?

10.
Yes No
Bottom of Form

If you answered "Yes" to any of these questions, you've conducted an informal sales forecast. There are two main approaches to sales forecasting: quantitative and qualitative, or judgmental. Often companies utilize both methods at the same time. Simply stated the word quantitative means estimating a particular, indefinite or considerable amount of anything. Quantitative techniques rely primarily on numbers to conclude forecasts. These numbers are

multiplied, added or correlated and then placed in a formula to predict the company's sales. You can start by building up to aggregate totals of market demand, or start with these totals and work the numbers down into more focused forecasts for individual products. Quantitative techniques are calculated from important numbers such as sales volume, gross national product, disposable income, and total number of buyers in the market. These numbers have been shown to have significant value in forecasting. If demand for your product is highly stable and predictable, the forecast consists of past sales and inflation to predict future sales. In formula form, it is simply: Past Sales + Percentage of Inflation Factor = Sales Forecast Monthly Forecasts In the event that monthly variations over a period of years have been small, another method of forecasting can be based on the distribution of sales by months. Suppose, for instance, that a short-term forecast is being made for the month of October. For the past several years, sales in October have totaled 12.5 percent of annual sales. During the same period, August sales have averaged 10 percent of annual sales. Sales during the previous August were $16,000. $16,000 / .10 = $160,000 (estimated annual sales)

Projected sales for October will be 12.5 percent of $160,000 (or $20,000). Sales for other months can be forecast in the same way. Next Step: Compute Your Monthly Sales Forecast (Qualitative Method) (Remember that if you sell more than one product or service, you'll need to prepare a separate forecast for each line and combine them to get a company-wide forecast.)
Top of Form

Enter your last month's sales Enter the percentage of annual sales this figure historically represents Estimated annual sales = Enter the percentage of annual sales the forecasted month's sales typically represent Sales forecast =

$ % $ % $

Bottom of Form

Annual Sales Forecasts A good starting point for any company conducting an annual forecast is the prior year's sales. Let's say in the last year, for example, Company X, a clothing manufacturer, has sales of $1 million. We will make several assumptions in determining Company X's sales for the current year. First, the company expects all of its current customer contracts to be renewed, and they expect to land a new contract worth $100,000. Finally, we are assuming apparel industry experts' predictions of 10 percent market growth in the current year are accurate. The sales forecast calculation would be as follows:

Last year sales = $1,000,000 Value of new contract in the current year = 100,000 Total projected sales = $1,100,000 Projected market growth = .10 Current year sales projection = 1,100,000 (.1) = 110,000 110,000 + $1,000,000 = $1,210,000 Next Step: Compute Your Annual Sales Forecast Project your current year annual sales by entering the figures for your own company into the following formula.
Top of Form

Last year sales = Total value of additional contracts you expect to land during the next year = Total value of contracts that will not be renewed during the next year = Projected sales subtotal = The percentage increase projected by experts for your industry's growth =

$ $ $ $ % -OR-

The percentage decrease projected by experts for your industry's decline = Current year sales forecast = $

Bottom of Form

Keep in mind that fluctuations can result between your projected sales and actual sales due to uncontrollable external factors, such as economic and political changes, employee turnover, technical and mechanical difficulties, and trend shifts. If the market behavior becomes less predictable, more diverse and complex forecasting methods are necessary. Many more factors need to be researched and placed into the formula. Generally forecasters will use more than one method. The following is a list of the different quantitative techniques; more detailed information can be found in most introductory books on statistical methods. 1. Correlation analysis, which uses one set of data to forecast another set of highly correlated data. 2. The market factor index method, which uses a formula incorporating factors predictive of sales volume to derive a market index figure. 3. The chain ratio method, which multiplies a base number by various qualifying percentages to derive forecasts. 4. The total market demand technique multiplies number of buyers by expected number of purchases, and cost per buyer, to derive forecast figures. 5. The market buildup approach, which totals estimated sales figures for individual products or market segments to derive forecast figures.

6. Time series projections, which projects past sales trends into future periods. It considers, trend, cycle, seasonal and random factors. Qualitative, or judgmental, forecasting does not rely on numbers to conclude forecast, but rather on intangible factors. This method is especially common when sufficient historical data isn't available, i.e., for a new business or a less-established market environment. Groups whose judgment is normally surveyed in preparing a qualitative forecast include the experts in the field, the sales force and the customers. Combining historical data with the judgment of people or groups presumed to have superior knowledge of sales only adds to the reliability and integrity to a company's sales forecast. Experience has proven that grass roots forecasts can be surprisingly accurate. Back to Outline V. How Sales Forecasting Applies to a New Business Statistics show that 80 percent of new business startups never survive the first three years. Nine out of 10 of those business failures are caused by poor management decisions. Implementing sales forecasting forces a new business to base decisions on facts rather than hunches. Since you have no historical information on your new business, i.e., past sales, you need to look elsewhere. You need to consider the following: 1. How well does your competition satisfy the needs of its potential customers? 2. Note the population and economic growth in your location. 3. Develop a customer profile. Experienced business people will tell you that a good rule of thumb is that 20 percent of your customers account for 80 percent of your sales. If you can identify this 20 percent, you can begin to develop a profile of your main markets. After you've identified your primary markets, then you need to determine trends in your industry. Now you need to know the approximate size and location of your planned trading area. Your trading area is how far your average customer will travel to shop, as well as how far you are prepared to distribute and promote your product or service. It is helpful to recognize the personality of your trading area, which can be found by talking to other neighborhood business owners, contacting the Chamber of Commerce, and reading the local papers. At this point, you should be able to estimate your sales on a monthly basis for a year. The basis for your sales forecast could be the average monthly sales of a few similar-sized competitors that are operating in a similar market. To estimate their sales, you have to list, profile and study your competitors. This is accomplished by visiting either their stores or the stores where their products are offered. You need to analyze their customer volumes, the location, hours of operation, traffic patterns, busy periods, quality of their goods and services, prices, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If possible, talk to customers and sales staff. Back to Outline VI. How to Produce a Sales Forecast You and Your Staff Can Believe In Though sales forecasting may seem number-driven, to succeed it needs to be people-driven as well. That means that the people in your business need to feel part of achieving the sales forecast. There are some simple rules you can follow to increase the probability of getting a forecast you can count on and one that people will do whatever is necessary to achieve. Action Plan for Achieving Forecasting Buy-In From Your Staff:

1. Share your expectations. Salespeople need to know the annual sales growth rate that you are looking for. Information and communication are key ingredients in securing an accurate sales forecast. It also creates a feeling of personal responsibility for the results. 2. Ask the right questions and insist on real answers. The real answers will contain evidence to support the numbers. Evidence means hard facts, not merely hunches, about what will directly affect your customers and their future purchasing decisions. Insist that everyone in your organization do their homework and talk to customers on a regular basis. 3. Make sure your salespeople understand that a sales forecast is for everyone's benefit. Personalize the numbers by showing how the success of your company is tied to the success of its employees. Also, point out exactly how each department's role fits into the bottom line. 4. Ensure accuracy in the sales forecast to prevent unforeseen layoffs or scrambling to find new personnel. Employees should feel confident that solid projections will ensure the safety of their jobs. 5. Get a second opinion. Have the forecast checked by a financial or accounting professional. Show them the factors you have considered and explain why you think the figures are realistic. 6. Once you believe the numbers are substantiated, accept what they say about your company. From that point on, all efforts should be directed toward meeting the projection. Regularly review and revisit the figures with key employees on a monthly basis to ensure that you're on track. Your skills at forecasting will improve with experience, particularly if you treat it as an ongoing "live" forecast. Back to Outline VII. Benchmarking - Actual Sales vs. Forecast It's a given that no one can forecast with 100 percent accuracy. Yet we can say with 100 percent accuracy that a poor forecast will negatively impact your company. Of course, you'll never completely eliminate the uncertainty in forecasts, but you can reduce it to a manageable level. By collecting proven facts and testing any major assumptions in a forecast before you conduct the forecast, you can greatly reduce the guesswork and increase the accuracy of your forecast. Problems arise not only when forecasts are too high, but also when they are too low. If a forecast is too optimistic, cash is often tied up in slow-moving inventory, and profit margins are reduced due to wasted overhead. On the other hand, if a forecast is too pessimistic, the result is poor delivery performance, dissatisfied customers and shortfalls in revenue because of limited product availability. Trends between past forecasts and actual performance need to be established and fed back to the forecaster to correct their optimism or pessimism in future forecasting. There are a number of reasons for slight deviations between projections and actual performance. Perhaps the forecasting process was viewed separately from the rest of the organization; or external factors, such as trends or new legislation, weren't taken into consideration. Significant discrepancies, however, such as a deviation of 15 percent or more in a month, or a cumulative deviation of 10 percent in a year, signals a need for much more detailed analysis to determine what has occurred. Self-Assessment Answer this questionnaire to determine the soundness of your company's sales forecasting system.
Top of Form

1. Are customer requirements analyzed in the development of your forecast?

2.
Yes No

3. Does your sales forecast include a buffer to allow for error?

4.
Yes No

5. Is the best judgment of the group exercised in improving forecast data, methods and techniques used?

6.
Yes No

7. Are changes in the forecast promptly reflected in production and inventory planning?

8.
Yes No

9. Are your sales forecasts tracked by comparing actual demand with the forecast?

10.
Yes No

11. Are your sales forecasts reviewed regularly by sales, distribution and manufacturing?

12.
Yes No
Bottom of Form

If you answered "No" to any of the questions, you will want to question the integrity and accuracy of your projection methods. Back to Outline VIII. Who Should Prepare Sales Forecasts? Most business experts agree that sales forecasting should be a joint effort. Generally the best people to perform such activities are those most closely involved with the company's sales activities. Involvement includes not only direct relationships with customers, but also an awareness of market conditions. Including key staff members from production, inventory management and marketing promotes a spirit of teamwork and improves your ability to make projections. The decreasing cost of personal computers has made it possible for small- and mid-sized companies to handle forecasting internally. However, there are also many firms that you can contract with to assist you. Locate them by obtaining referrals from your peers or checking trade publications. Back to Outline IX. Software as a Tool for Sales Forecasting

Projections become even more precise when software programs written specifically for sales forecasting are utilized. Investing in a simple but effective forecasting package can also free up the time of valuable personnel. All basic sales forecasting software packages evaluate the history of your business, extrapolate pertinent information, and offer a forecast of your company's future. When shopping for a good software package, look for the following features: 1. Capability to adjust for special factors, i.e., promotion and price changes 2. Documents underlying forecasting assumptions 3. An effective management review and communication step 4. Historical data-tracking and plotting of current performance against past trends and future projections 5. Allows multiple parties (e.g., sales, marketing, manufacturing and logistics) to enhance, manipulate and use the forecast Unfortunately, such programs are not usually stocked in computer software stores. To locate the companies that produce this type of software, you can contact professional associations, check ads in your professional magazines, and talk with other businesspeople for recommendations. The Internet is a great additional source for seeking out these companies, and a simple search will bring up several choices. As you research forecasting software you will find those that run the gamut of very affordable to very expensive. Some examples include: Strategic Planning Software ($29), Ward System Group's Neuroshell PREDICTOR ($395) and ParkerSoft Products' Exforecaster 1.0 ($99) and Fastcast ($600.00). Before purchasing a program, it is advisable to either download or request a demo program for evaluation. Be aware that some software programs are not stand-alone and often require another program such as Excel and Oracle Personal Express to be installed on your computer. Sales forecasting is an unwieldy and difficult process, yet doing it correctly is key to understanding what's in store for your business' future. The numbers you come up with will permeate almost every aspect of your company, making it all the more important to ensure accurate forecasts. By using the information presented here, you can develop a realistic projection for the future performance of your organization. Back to Outline X. Resources Evetts, Jonathan, "Seven Pillars of Sales Success." Sterling Publishing Co., 1990. Bangs, Jr., David H. Bangs, "The Start Up Guide." Upstart Publishing Co., 1989. Leza, Richard L and Placencia, Jose, "Develop Your Business Plan." The Oasis Press, 1988. Bangs, Jr., David H. Bangs, "The Market Planning Guide." Upstart Publishing Co., 1998. Burstiner, Irving, "The Small Business Handbook." Simon & Schuster Inc., 1997. Resnik, Paul, "The Small Business Bible." John Wiley & Sons, Inc., 1988. American Marketing Association National Federation of Independent Businesses International Council for Small Business U.S. Department of Commerce U.S. Small Business Administration Quicken Business Online Business Links

Small Business Information/Mining Company

Sales forecasting is the process of organizing and analysing information in a way that makes it possible to estimate what your sales will be. This Micro Module outlines some simple methods of forecasting sales using easy to find data. Books containing simple and sophisticated techniques of forecasting sales can be found in libraries and business oriented book stores. If you sell more than one type of product or service, prepare a separate sales forecast for each service or product group. There are many sources of information to assist with your sales forecast. Some key sources are: Competitors; Neighbouring Businesses; Trade suppliers; Downtown business associations Trade associations; Trade publications; Trade directories; Factors that can affect Sales can be divided into external and internal influences. Examples of these are: External: Seasons; Holidays; Special Events; Competition, direct or indirect Competition, External labour events; Productivity changes Family formations; Births and deaths; Fashions or styles; Population changes; Consumer earnings; Political events Weather Internal: Product changes, style, quality; Service changes, type, quality; Shortages, production capability; Promotional effort changes Sales Motivation plans; Price changes; Shortages, inventory; Shortages/working capital; Distribution methods used Credit policy changes; Labour Problems Creating a sales forecast can be divided into four steps. Step 1 Develop a customer profile and determine the trends in your industry. Make some basic assumptions about the customers in your target market. Experienced business people will tell you that a good rule of thumb is that 20% of your customers account for 80% of your sales. If you can identify this 20% you can begin to develop a profile of your principal markets. Sample customer profiles: male, ages 20-34, professional, middle income, fitness conscious. Young families, parents 25 to 39, middle income, home owners. Small to medium sized magazine and book publishers with sales from $500,000 to $2,000,000 Determine trends by talking to trade suppliers about what is selling well and what is not. Check out recent copies of your industry's trade magazines. Search the Business Periodicals Index (found in larger libraries) for articles related to your type of business. Question: What are five customer profiles for your business? Question: What are some customer trends for your customers/clients? Step 2 Look at the area where you will be trading Establish the approximate size and location of your planned trading area. Use available statistics to determine the general characteristics of this area.

Use local sources to determine unique characteristics about your trading area. How far will your average customer travel to buy from your shop? Where do you intend to distribute or promote your product? This is your trading area. Estimating the number of individuals or households can be done with little difficulty using national census data to be found at your library or town hall. Your local statistics office or chamber of commerce can identify what the average household spends on goods and services. Neighbourhood business owners, the local Chamber of Commerce, the Government Agent and the community newspaper are some sources that can give you insight into unique characteristics of your area. Question: What are the statistics on the people in your area? Step 3 List and profile competitors selling in your trading area. Refer back to the data you collected in your market research. Get out on the street and study your competitors. Visit their stores or the locations where their product is offered. Analyse the location, customer volumes, traffic patterns, hours of operation, busy periods, prices, quality of their goods and services, product lines carried, promotional techniques, positioning, product catalogues and other handouts. If feasible, talk to customers and sales staff. Step 4 Use your research to estimate your sales on a monthly basis for your first year. The basis for your sales forecast could be the average monthly sales of a similar-sized competitor's operations that are operating in a similar market. It is recommended that you make adjustments for this years predicted trend for the industry. Be sure to reduce your figures by a start-up year factor of about 50% a month for the start-up months. Consider how well your competition satisfies the needs of potential customers in your trading area. Determine how you fit in to this picture and what niche you plan to fill. Will you offer a better location, convenience, a better price, later hours, better quality, and better service? Consider population and economic growth in your trading area. Using your research, make an educated guess at your market share. If possible, express this as the number of customers you can hope to attract. You may want to keep it conservative and reduce your figure by approximately 15%. Prepare sales estimates month by month. Be sure to assess how seasonal your business is and consider your start up months. Further tips Sales revenues from the same month in the previous year make a good base for predicting sales for that month in the succeeding year. For example, if the trend forecasters in the economy and the industry predict a general growth of 4% for the next year, it will be entirely acceptable for you to show each months projected sales at 4% higher than your actual sales the previous year. Credible forecasts can come from those who have the actual customer contact. Get the salespersons most closely associated with a particular product line, service, market or territory to give their best estimates. Experience has proven the grass roots forecasts can be surprisingly accurate. Sales Forecasting and the Business Plan Summarize the data after it has been reviewed and revised. The summary will form a part of your business plan. The sales forecast for the first year should be monthly, while the forecast for the next two years could be expressed as a quarterly figure. Get a second opinion. Have the forecast checked

by someone else familiar with your line of business. Show them the factors you have considered and explain why you think the figures are realistic. Your skills at forecasting will improve with experience particularly if you treat it as a "live" forecast. Review your forecast monthly, insert your actual, and revise the forecast if you see any significant discrepancy that cannot be explained in terms of a onetime only situation. In this manner, your forecasting technique will rapidly improve and your forecast will become increasingly accurate. About the Author Ben Botes is an author, entrepreneur and expert speaker on new venture creation. He is also the founder of aweb portal for first time business owners and entrepreneurs. Contact: ben.botes@my1stbusiness.com

Questions about this article? Visit the 247advisor.com forum for free, expert advice.