Sales forecasting

Sales forecasting is a crucial part of business planning.

The sales forecast forms the basis for most other common parts of business planning:

• Human resource plan: how many people we need linked with expected output
• Production / capacity plans
• Cash flow forecasts
• Profit forecasts and budgets
• Part of regular competitor analysis and helps to focus market research

Key Factors Affecting the Accuracy and Reliability of Sales Forecasts

Sales forecasting requires a subjective judgement about an uncertain future. So it is inevitable that actual sales will differ from those forecast. Key factors that create this variability include:

• Consumer trends
  • Demand in many markets changes as consumer tastes & fashions change
  • Affects both overall market demand & the market shares of existing competitors
• Economic variables
  • Demand often sensitive to changes in variables such as exchange rates, interest rates, taxation etc.
  • Overall strength of the economy (GDP growth) also important
• Competitor actions
  • Hard to predict, but often significant reason why sales forecasts prove over-optimistic

Circumstances Where Sales Forecasts Are Likely to be Inaccurate

The situations where actual sales are most likely to be significantly different from the sales forecast include:

• Business is new – a startup (notoriously difficult to forecast sales)
• Market subject to significant disruption from technological change
• Demand is highly sensitive to changes in price and income (elasticity)
• Product is a fashion item
• Significant changes in market share (e.g. new market entrants)
• Management have demonstrated poor sales forecasting ability in the past!