Strength & Weaknesses of Sales Forecasting

Companies focus on sales for good reason. Sales are how a business earns money to continue operations and justify its existence. Therefore, it becomes paramount for a business to forecast where it thinks sales are heading in the future. Sales forecasting provides a company with a framework for managing and tracking sales. On the other hand, forecasting sales is only as good as the available data.

The strength of sales forecasting is that it forces a company to think about how it intends to monitor and track sales beyond the current period. By thinking ahead, management can adjust the business strategy based on its prediction for sales growth. Sales forecasting based on prior sales results and management experience reduce the chances of the company being blindsided by a surge or drop in demand. For example, if management notices a seasonal pattern in sales, it can hire or reduce staff accordingly. Management can also track sales per item and use this information to focus stronger selling products and services.

Sales forecasting relies on historical data or prior results to predict future expectations. However, if there is limited data available because the company is new, this mitigates the effectiveness of putting together a sales forecast. Even so, past sales results are not always indicative of future sales results. In addition, sales forecasting uses some form of projection about future demand interpreted through consumer preferences, opinions and attitudes. This may be hard to gauge, since consumer demand is a moving target. In addition, the time series may have changed making the past sales data irrelevant for developing a sales forecast.

When it comes to forecasting sales, nothing is guaranteed. However, it is still an important endeavor for a company to undertake. A starting point is using prior period sales results. A company needs to then compare actual results against its forecasts. If there is a wide disparity, management needs to adjust sales assumptions. The longer the historical sales information, the better equipped management is to make sound forecasts because having a longer time series allows the company to identify trends. The measuring stick for the effectiveness of a sales forecast is how close the actual results come in to management's predictions.

Forecasting sales can be a complicated affair depending on how in-depth a company wants to go regarding its assumptions. Sales forecasting can include "macro" data, which concerns overall market demand and general economic factors such as level of employment, interest rates and consumer spending. On the other hand, "micro" data deals with the company's unit sales within the industry. The strength of doing a macro analysis and microanalysis is that it forces the company to look at internal and external factors that impact sales. However, developing comprehensive forecasts that include the general economy is time consuming and expensive. Many large organizations hire economists to create sophisticated sales forecasts for a product.