Sales forecasting is a marketing management technique used by business managers to predict future sales over a period of time. Specifically, estimate a company’s level of sales.
This quantitative management tool also helps to forecast sales trends in the future.
Sales forecasting can help the business identify in advance problems and opportunities related to selling products to the market. This improves the marketing planning process as awareness from sales trends inform marketing strategy for the future.
Why sales forecasting is important to a business manager?
To conduct sales forecasting, marketing managers estimate potential number of products that could be sold as well as analyze sales trends to evaluate its significance for marketing planning, especially resource planning.
That is why sales forecasting is essential for planning purposes.
Forecasting future sales has several important applications. The firm can use this information to:
- Plan future production levels. The questions how many products should be manufactured and how much raw materials should be purchased need to be answered. This will allow for a more efficient use of the firm’s resources, in particular labor which is normally a firm’s highest cost. It will identify recruitment and training needs, or depressingly the requirement for redundancies.
- Improve Cash Flow and Working Capital. Being able to accurately predict future sales aids Cash Flow management as it helps to calculate liquidity and workforce planning as it helps with deciding how much workers will be needed in the future. Examining variations in sales and predicting future sales can help the firm plan for its liquidity and evaluate the need for additional sources of finance. Lenders will be more likely to supply additional funds if they can see that the firm will be able to repay on time.
- Improve stock control. Accurate sales forecasts will underpin stock ordering and ensure that production has the raw materials when required. Stock represents is tied up cash, so maintaining the correct level of stock will also help liquidity. This knowledge how much to produce and waste less will contribute towards increasing efficiency.
- Drive marketing campaigns. The identification of key periods for company sales will allow the firm to plan effective marketing including distribution, pricing and promotion.
- Underpin the budgeting process. Sales are a major driver of marketing budgets.
- Want to identify significant trend. Firms want to know what trends are emerging to make sure they can adapt their marketing or product portfolio to reflect this.
- Want to see, if any seasonal factors affect their product. Customers enjoy strawberries more often than just in the summer, so the major supermarkets import from warmer climates. That way they can eat strawberries and cream 12 months of the year, but at a price.
- Want to identify the influence of economic cycles that arise within the firm’s demand patterns. Is the firm’s demand closely linked to the state of the economy?
Two approaches to sales forecasting
Sales forecasting is conducted based on market research – data and information gained from both primary market research and secondary market research.
There are two broad approaches towards sales forecasting:
- Analyze past sales results and use them to predict the future sales.
- Ask customers, managers and industry experts what future sales might be.
Sales forecasts form an essential part of the market planning process. Forecasting can be done for both exiting products as well as a part of the screening process before new products are launched onto the market. There are many companies that provide business data such as Data Cube, consultancy experts in the data field.
Sales forecasting is great!
If business managers could predict the future sales accurately, the risks of running a business organization would be reduced significantly. Here are potential benefits for different business departments:
- Marketing Department. The Marketing Manager would know exactly how many products to produce and distribute to customers.
- Finance Department. The Finance Manager would know exactly how much sales revenue and the cost of production is going to be leading to better cash flow planning.
- Production Department. The Production Manager would know exactly how many products to manufacture. This will help with ordering the exact amount of raw materials.
- Human Resources (HR) Department. The HR Manager would know exactly how many workers to hire thanks to accurate workforce planning leading to appropriate level of staffing.
But, sales forecasting is not ideal!
Predicting the future is not that easy. While some forecasting is important and necessary, precision in sales forecasting is impossible to achieve.
There are just so many variables in internal and external business environment. Those factors are constantly changing making any forecasts can turn out to be completely inaccurate as early as next week. It is because of all those external factors coming from the economic climate can influence sales performance.
The further into the future, the more difficult it is to forecast sales.
However, despite the great unpredictability, most of the businesses do sales forecasting, and should continue making sales forecasts, in order to reduce the unforeseen nature of future changes, hence minimize the risk.
