If you own a small business, success will not come to you if you only wait for it. Instead, you need to go toward it. This is why it’s crucial if you’re a small business owner (or any size business owner for that matter) to predict the future and know where your company is heading. But how do you predict the future without a fancy crystal ball? That’s the domain of sales or demand forecasting and I’m going to explain what it is all about in this article.
What is Sales Forecasting?
There are several definitions of sales forecasting, but I like the one from Hatchbuck so I’ll borrow it to help you better understand it:
A sales forecast allows you to determine what your estimated sales (Revenue, New Customers, etc.) will be for a given time period. The forecast is generated from an analysis of previous data about your sales, the sale of similar products by your competitors, and market response to your offerings.
There are basically two types of forecasting, depending on how long it takes:
- Short term forecasts are for a period of 1 year. These types of forecasts are mainly used to make certain tactical decisions and focus on seasonal cycles and growth patterns.
- Long term forecasts are for longer periods, of more than a year. These are necessary for establishing the company’s long term vision and setting up new locations and business units.
What Steps You Need to Take in Forecasting?
Forecasting sales demand should never be done ad hoc. The wrong forecast will easily lead you to the wrong conclusions. It’s best to avoid it, naturally.
Here are 4 steps that you need to take in forecasting your demand:
- Appraise your past sales
“You have to know the past to understand the future”, as Carl Sagan once said. If you don’t know your old sales and haven’t learned from them, how do you expect to improve your future sales?
For an already established product, look at your previous sales, going back 3-4 months or even more if possible. Evaluate every part of those sales, including monthly sales, sales rep, distribution and price. The more data you have, the better. However, even if you only have one location, one product and one sales month, you can still earn a lot from this.
- Talk with your sales reps and retailers
Who knows the sales better than those directly involved such as sales reps and retailers. Their input will be extremely valuable in forecasting future sales. Get them in the room and let them tell you their insights from talking with customers. You might not even realize that you’re using a wrong distribution channel or have set your prices too high. But if you have sales reps that keep their ear on the ground, you can learn this sooner and correct accordingly.
- Pay attention to industry trends
Forecasting can’t be done in a vacuum. If you don’t follow up with your industry’s trend, you risk being left behind. Websites of your industry’s trade associations are the first step you need to take to learn about the latest trends, new competition, whether a competitor has left the market, new competing products and services and more.
Industries and markets change all the time. If you are not paying attention, others do and will have a head start.
Once you’ve evaluated your past sales, had a face-to-face meeting with sales reps and retailers and have picked up on the latest trends in your industry, there’s only one thing left to do. Create your forecasts.
Typically, you want to create as many forecasts as you can, but you should create at least five. One for each quarter and one extra for the next year. You should also create forecasts based on your current price point. Create one lower and one higher as well as best-guess scenario that you get from analyzing your current performance.
Finally, create one optimistic and one pessimistic forecasting scenario, but in the end, stay realistic with your forecasts.
Don’t expect success if you don’t accurately forecast. Forecasting can help you learn what mistakes you’ve made in the past and how to move in the future. This makes it crucial for any small business.
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