Sales forecasting helps marketing managers to estimate future sales of products and reduce the risk of unforeseen changes in the marketplace.
Essentially, sales forecasts will help with visualizing what to expect in the near future.
Let’s take a look in details at advantages and disadvantages of forecasting future sales.
Advantages of sales forecasting
Benefits of sales forecasting include:
- Stronger liquidity position. With clear idea about expected revenues and costs, the firm can more accurately predicts its future Cash Flow and Working Capital. Better identification of the demand for products as well as knowledge about costs and revenues will improve the firm’s liquidity position. This is because when managers have clear idea about future numbers, they are more likely to have better cash flow management in the coming months.
- Better inventory control. The business must ensure that the correct levels of stocks are available for use in production at different times of the year. Accurate sales forecasts can help to determine how much raw materials are needed, so production managers will be able to optimize their purchasing plans. Holding too much inventory and too little inventory can cause serious problems as the first one will increase the costs of production and the latter one will leave customers without products.
- Improved production efficiency. Sales forecasting will help the firm to better manage its production processes, therefore operate more efficiently and profitably. Managers will be able to temporarily hire more part-time employees during peak trading periods with high demand, devote more time to planning rather than solving current problems or better use the firm’s scarce resources.
- Helps to secure sources of finance. Accurate sales forecasts are a common requirement for business plans, and can help to obtain external financing from investors and lenders. This is especially important for start-up companies.
- More accurate budgeting. By anticipating future changes in the economy and adjustments in sales trends, marketing managers will be able to work with finance managers to adjust budgets accordingly.
Disadvantages of sales forecasting
Drawbacks of sales forecasting include:
- Limited data and information. Sales forecasting is only a prediction based on the past data, information, insights and trends. Only quantitative factors are considered to make those assumptions about the future, and we know that not everything that counts can be counted. Sales forecasting does not reveal the whole picture and forecasts are only as good as the information and data that are available at the time when the sales forecasts are made.
- Often inaccurate predictions. Sales forecasting can be biased or subjective as it is mostly just part fact part guesswork. Managers will make assumptions which are often influences by their own experiences or gut feelings. Even the most accurate sales forecasts are based on personal assumptions. In case of new products, having no or very limited historical data can make sales forecasting extremely difficult or even impossible to carry out.
- Assumes future will mirror the past. Sales forecasts are based on assumptions only rather than hard facts. Most of the forecasting is done based on past trends which do not indicate the future anyhow. Assuming that future will be the same as the past usually never comes true, and this kind of thinking might be a very costly mistake.
- Garbage In Garbage Out (GIGO). Any incorrect, outdated or biased date used to make a sales forecast will produce unrealistic results. While some managers might underestimate sales forecasts on purpose to reach their targets and receive quarterly bonus on performance, other managers may be too optimistic about future sales results just to show that they are doing a good job.
- Strong external influences. Sales forecasting ignores external factors that are not quantitative. Some events in our lives are not predictable. Natural disasters happen beyond our control, weather conditions can change abruptly, oil price record extreme spikes, new competitors enter the market, new changes in the law are implemented or wars which can start anytime can significantly influence sales. All of those qualitative factors from the external environment are not included in the sales forecast, but can significantly distort future sales of the business.
Common mistake people make about sales forecasting
People often think that the sales forecast was not good because the future numbers were different. This is incorrect thinking.
Although future sales numbers do not match the predicted sales figures, the original forecast was correct considering the knowledge that managers had had at the time of constructing that forecast. It is simply that market situation changed causing the forecast to become different.
There are many sales forecasting techniques, both qualitative methods and quantitative methods, which I am going to write about in the next couple of articles. They all can produce lots of reliable data for marketers about future sales performance.
