The Advantages of Demand Forecasting
Demand forecasting helps companies prepare beyond the current period. This allows the company to be more efficient in how it allocates its resources — which is important for any company, but especially so for small businesses. Companies use demand forecasting to get a leg up on the competition, and the process also allows a company to assess its own performance.
Companies uses demand forecasting as a basis for making sales projections. Sales numbers receive a lot of attention because they are the source of a company's money stream. By analyzing demand, a business can make predictions about sales and allocate resources accordingly. For example, if a retail store expects stronger-than-usual demand for a particular item during the holiday season, it can hire more sales staff to accommodate the needs of its customers.
In business, companies seek ways to gain an edge over competitors through marketing strategies, whether they are offering a product or a service. By forecasting demand for future periods, a company can alter its business and marketing strategy to satisfy expected demand by its customer base.
For example, by monitoring consumer demand at specific prices, a business can stock items that sell well and scale back on items with poor sales. The company can also use this information to make adjustments to its pricing strategy, focusing on higher margin items or products that are in high demand. By following demand closely and making forecasts, the business gains an advantage over competitors who fail to identify a shift or change in demand
Demand forecasting also allows a company to control its production costs. For example, a company can place an order for raw materials ahead of time to take advantage of favorable pricing if it forecasts an increase in demand. Demand forecasting allows a company to budget accordingly, making it more efficient than it would be in operating on a response basis only. A business can justify a reduction in spending for advertising and promotion if its demand forecast calls for it.
Every business should assess its performance. This means identifying the things that it does well and where the business missed the mark. Demand forecasting gives the company a basis to compare actual demand with management's expectations. In this way, demand forecasting acts as a check and balance. The company can identify how far its demand forecast is off from actual demand, and make adjustments to its business model accordingly.
A company's financial statements provides a scorecard for the company's performance, and demand forecasting allows a company to produce pro forma financial statements for planning and tracking overall performance.