H O P P E R P E D I A ©
-Brian Hammons
Accurate Sales Forecasting
Let's Get Into the Right Mindset:
We all know how it feels to be in a big crowd of people feeling very subjective about what you are doing at that very moment. Where you have to go, what you have to do or who you need to help. But you can choose to pause and objectively look around at any time. Everyone around you will adjust their actions based on the new stationary element in their way. You can then actively monitor every aspect of every person and every situation that's going on around you. You'll notice the good, the bad and the avoidable. Thats how your business has to be run, and thats how you have to treat sales forecasting.
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.
Brief Overview:
A sales forecast is a prediction based on past sales performance and an analysis of expected market conditions. The true value in making a forecast is that it forces us to look at the future objectively. It will also help you establish your policies and procedures so that you easily can monitor your prices and operating costs to guarantee profits, and make you aware of minor problems before they become major problems.
Here's a confident, simple, and objective start down the right path:
1. Is your product desirable? Prove it....
Preparing a Sales Forecast
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:
What are the items to be forecasted (individual product lines or business units)?
How far in the future should the forecast extend?
How frequently should the forecast be made?
How frequently should the forecast be reviewed?
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:
Accounting records
Financial statements
Sales-call reports
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.
Forecast Performance
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:
-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.
-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.
-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.
Approaches to Sales Forecasting
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.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.
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
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.
