Sales forecasting techniques use sales data from past years to predict a company's future performance. Sales forecasts allow companies to anticipate their revenues and plan for upcoming demand. These forecasts give business owners a keen understanding as to which products or services are selling well, which are selling poorly, and what times of the year each product or service performs at its best. The information gleaned from sales forecasts also helps companies allocate their internal resources, such as advertising, employees and storage space, for maximum potential profits.
A major component in developing a sales forecast is the accumulation of sales data from previous years. Sales data can help business owners spot trends in seasonal purchases, customer tastes and market trends. For instance, retail store managers can use the monthly sales data for the previous three years to track the performance of specific products. If sales of a product peak during the winter and wane in the warmer months, the manager can forecast that sales for that product will be strong the following winter.
The model used to create the forecast can be as important as the data used to create it. Some businesses simply take an average monthly sales of a product over time and create a simple forecast. For instance, if a product's January sales over the prior three years were 220, 200 and 210 units, the sales manager could forecast that next January's sales would be the average of those three numbers, or 210 (220+200+210=630; 630/3=210). However, more sophisticated forecasting models account for different factors.
A key aspect to creating an accurate sales forecast involves an understanding of the purchasing factors that go into a customer's decisions. These factors can include economic fluctuations, technological trends and news reports. As an example, a news report can show viewers that a dinner of steak and red wine is healthier for them than fish and white wine. A fine dining restaurant can then forecast that sales of steak dinners and red wine will increase, while their fish dinners and white wine sales will decline.
Sales Forecasts and Budgets
Accurate sales forecasts are crucial elements in developing accurate company budgets. Since sales forecasts can anticipate a company's revenues, these revenue estimates can be used in budget calculations. Sales forecasts of individual products or services help business owners decide where to allocate their funds. In the restaurant example above, the restaurant owner sees the forecasts that customers will buy more steak and less fish. The restaurant owner will then create a budget that will allow him to spend more on steak and less on fish.