Each year as part of the business planning process, a small-business owner and his marketing team prepare a sales forecast. Accurate forecasting is very important because if sales results fall significantly below forecast, the company may face a serious cash deficit. In addition, the sales forecast affects other operational areas besides marketing. The production staff uses the forecast to determine the production capacity and staff required to produce the planned number of units. Small-business owners find that the accuracy of their forecasts is limited by factors outside their control.

Lack of Sales History

Sales forecast are based upon what the company has been able to achieve in the past. Early stage companies do not have significant revenue history to rely on. They may be anticipating rapid growth, but forecasting exactly what the growth rate might be is difficult. Companies expecting high revenue growth also find it difficult to accurately forecast what sales might be without a track record to base projections on.

Difficulty Forecasting the Industry and Competition

Industry conditions and the competitive environment both affect a company's sales potential. You must forecast how you believe the industry will grow in the next year and whether competition will become more intense. Both of these factors are in flux. For example, the national economy could go into an unexpected slump that negatively affects your industry's growth. New competitors could enter the market and implement their own strategies to try to take sales away from your company. This state of constant change limits your ability to make sales forecasts you can depend on.

Tendency to Be Optimistic

You should always involve the members of your sales staff in the forecasting process. They are in close contact with your customers and have a good feel for how the business environment is now and is likely to be next year. However, salespeople tend to be optimistic. They always believe they can exceed the sales performance they achieved in the past. If you have five equally optimistic salespeople and they each give you sales goals for the upcoming year, you are likely to end up with a total company forecast that is too optimistic. Part of the owner's task is to temper this optimism so the forecast is achievable.

Consumer Behavior is Hard to Predict

A small-business owner and his marketing staff are never absolutely certain their marketing message will resonate with the target customers, or whether they have chosen the best media to deliver the message. This uncertainly leads to both revenue surprises and disappointments. Ultimately, the customers wield the power. They may not be convinced by your marketing campaign that your products or services are superior to those offered by your competitors. Also, consumer tastes and preferences may change during the course of the year.

Management Inflexibility

The effectiveness of the sales forecasting process can be limited by the inflexibility of the company owner, if you view the sales targets as set in stone. If significant negative variances to forecast occur, some owners don't adjust them but instead try to motivate the sales staff to work harder. This can result in frustration and a drop in sales staff morale, because sales staff compensation is at least partially based on reaching the targets. A better approach is to use a rolling 12-month forecast that is adjusted each quarter as actual results are posted. This method recognizes that the business environment is constantly changing.