Objectives of Sales Forecasting

Sales forecasting provides a business with a set of predictions about the kinds of sales it can expect on a month-to-month basis, typically within a one-year timetable. Many sales forecasts use statistical data and techniques, such as regression analysis, to make predictions. Other approaches make educated guesses about how current economic and social trends will play out in the future and the impact of those trends on sales. A sales forecast helps businesses manage several key objectives.

While a sales forecast only offers a prediction, it allows the business owner to make reasoned decisions about how to spend. For example, the owner can use the forecast to set a static budget for each month that covers payroll, rental costs and utilities in order to keep valuable staff during low profit periods. The business owner also can use the forecast to plan implementation of an expensive change initiative right after a peak sales period, because the business can ensure enough working capital to support the project.

For seasonal businesses that experience a large upswing in demand only at certain times, the sales forecast can help to determine appropriate staffing levels for those periods. Tax preparation services, for example, see heavy demand in the spring. If the forecast calls for double the sales in the spring, the business might hire one additional person, while a forecast of quadruple the sales might call for two or three additional staff members. In other cases, an anticipated slow period may lead the owner to trim hours across the board, rather than reducing total staff.

Businesses that manufacture a product also can use sales forecasts to make tentative plans for materials purchasing and production levels. For example, if there is a predictable drop-off in demand during summer months and a correlated drop in material costs due to lower demand, the business might reduce production levels and increase material purchasing during those months. Some businesses choose to use predictable downtime to increase available stock as preparation for anticipated upswings in sales.

A sales forecast also can help business owners secure additional funding. Unlike the present value of a business, typically based on assets, the sales forecast helps to show what kind of return on investment the business is likely to generate for potential investors. A sales forecast that shows projected sales in excess of the present value of the business makes a strong argument for investing, since the investors can anticipate a higher return on investment.