Is your business scaling up? Then you must have a sales forecast. No excuses. Having a sales forecast will allow key decision makers in the business to make better-informed decisions in key areas of the business:
- Production timelines
- Supply chain management
- Financial planning
- Profitability analysis
You are in business to make money. How can you do that if you do not know what your sales are going to be? There is little point having a huge marketing budget but not having enough sales to pay for it.
This depends on the size and scale of the business. If you have many customers all with different trading terms and many products that sell to each of them a highly-detailed forecast would be the best option. If your business only has a handful of customers and few products a simplified version would suffice.
However, my opinion is for the detailed forecast every time. Always start with the end in mind; the business may only be small NOW but by scaling up there is the chance that the business will rapidly expand. Having systems in place in advance of this expansion will make coping with the extra demands of sales forecasting easier.
I always prefer to KISS – Keep it simple, stupid. Detailed doesn’t mean complex. A good forecast can be built from four key areas:
- WHO is the customer?
- WHAT are the products?
- WHEN will they be sold?
- WHAT are the trading terms of each customer?
Whilst a forecast can be detailed, it is only an INDICATION of where you expect the business to be at a set point in time. The forecast produced in three months will be different to the forecast produced today. Why? Because the business environment is constantly changing; a new product may not sell well, customers may take lots more products than planned, you may have delivery/production issues. The list is endless.
There isn’t a need to spend days or weeks calculating the sales down to the final penny. You need to be able to convert a unit forecast into a financial forecast quickly to inform the key stakeholders in the business what they can expect to happen over the next year.
Once the forecast has been produced it is vital to see where the changes have occurred and investigate why, and more importantly, can you learn from this and improve the forecasting process.
After the Forecast
After the forecast has been distributed to the business this will inform the management in each area well in advance the actions that need to be taken to meet the demand of your customers.
Performing an analysis of your previous month’s forecast against the previous month’s actual sales is very important as it can reveal lots about what is happening in your business. A customer may be continually sending a forecast which they never meet, this will have a big impact on your bottom line as your business will have excess stock which it may not be able to sell. Similarly, a customer may submit very low forecasts versus their actual orders. This can leave you in the embarrassing position of short delivering on orders. How can you expect a customer to commit to a big order for a new product if you cannot meet their orders for the current product range?
Who to Call?
Large organisations often have in-house forecasting teams and systems that can cope with massive datasets. If your business doesn’t have this luxury it would be advisable to consider seeking outside help to set up your forecasting system, or even to do the work for you. Having a good forecast will help with your business decision-making.