Sales forecasting is the process of predicting future sales based on historical data and other relevant information. It helps businesses understand where they are now, plan for the future, and make adjustments along the way to stay on track. 

Sales forecasting also helps companies anticipate demand so they can react accordingly. If you don’t have enough of a product, you won’t be able to meet demand and risk losing customers. If you have too much of a product, your supply costs will increase and risk having products go stale before you can sell them. 

With effective sales forecasting, your company will know how much inventory to keep on hand at all times. That way, you won’t run out of products and risk losing customers as a result. 

This article explains why sales forecasting is so important and what it entails.

 

Why is sales forecasting so important? 

As the name implies, sales forecasting helps businesses forecast sales. The more accurate your sales forecast is, the more successful your business will be. 

Without an accurate sales forecast, you won’t know how many products to produce and how many customers to hire based on estimates and projections. 

The sales forecast is the foundation for business planning and decision-making. It allows you to manage cash flow and forecast inventory demand so you don’t run out of products. 

Effective sales forecasting will also allow you to identify trends and make strategic decisions to stay ahead of the game. For example, if you notice that a certain product is more popular than usual, you can try to increase production and meet the demand before it grows even more. 

Without sales forecasting, you won’t know that customers are demanding more of the product and are out there waiting for you to supply more. 

 

Why is effective sales forecasting so important? 

Sales forecasting is important in terms of accuracy, but it’s critical to be effective with your forecasts. In other words, you want your forecasts to be accurate and useful at the same time. 

You want your forecasts to be accurate so you can make sound business decisions and ensure your company doesn’t run out of products. You want your forecasts to be useful so you can make the right decisions at the right time. 

If your forecasts are accurate but not useful, they won’t help you make sound business decisions. If your forecasts are accurate and useful, you’ll have the information you need to make the right decisions at the right time. 

For example, if you’re trying to make a decision about hiring additional employees, you’ll want to know how much demand you have for a certain product. If you have an accurate forecast, you’ll know the demand for that product and can decide whether you need to hire more people to meet it. 

 

Determining demand estimations 

There are many ways you can determine demand estimations. Once you’ve identified your forecasting objectives, you can decide what’s best for your company. 

There are three main demand estimation methods: 

• Trending
• Seasonality
• behavioural. 

Trending demand occurs when a product is cyclical. You can see how much demand there is for the product over time, which allows you to predict how much demand there will be in the future. 

You can look at historical demand data and try to find trends. For example, if you see that demand for the product is low in the summer, you can expect lower demand in the summer months in the future as well. 

Seasonality is when you notice that demand for a product is seasonal. For example, sales for ice cream are highest in the summer because it’s a hot-weather treat. If you notice that a product’s demand is seasonal, you can predict that it will be higher in certain seasons in the future. 

Behavioural demand is when you see how a product is purchased or used. For example, if you notice that customers buy an accessory with a large portion of their purchases, you can estimate that demand for the accessory is high. You can then estimate that demand for the accessory will be high in the future as well. 

 

Forecasting methods: Which one is right for you? 

There are many different forecasting methods for demand estimation. Once you’ve decided which method is the best fit for your company, you can use it to forecast future demand. 

Peak-and-trough analysis – This method involves looking at past sales data to find the highest sales point and the lowest sales point, then projecting that information forward to see where you’ll be in the future. 

Sales/inventory ratio – This method involves taking the sales for a product, dividing that number by the inventory for that product, and then projecting that information forward to get future sales. 

Sales/production ratio – This method involves calculating the sales of a product, dividing that number by the production cost of that product, and then projecting that information forward to see what the sales will be in the future.

 

Estimate demand with trending products 

If you notice that a product has trending demand, you can estimate that demand will stay consistent in the future. You can use the past data to see how much demand a product has had over time and project that data forward to see how much demand the product will have in the future. 

To do this, you need to keep track of the inventory at all times and make sure it’s consistent. If you see that demand is trending upward, you don’t want to run out of products. However, if you keep inventory consistent, you won’t have to worry about losing customers because you ran out of a product. 

To estimate future demand for a trending product, you need to look at past sales data and estimate how much demand there was for the product in each period. Then, you can project forward to determine how much demand the product will have in the future. 

 

Estimate demand with seasonality 

If you notice that a product has seasonality, you can predict when demand will be higher than normal. You can then prepare for that period by having more products on hand. 

This method is used to predict demand around holidays. For example, if you know that sales are higher around the holidays, you can estimate that demand will be higher around those times. 

To estimate future demand with seasonality, you need to keep track of the inventory at all times and make sure it’s consistent. You also need to track the sales and seasonality of the product. 

If you notice that demand is higher around a certain time each year, you can project that demand will be higher around that time in the future. 

 

Estimate demand with customer behaviour

If you notice that customers are purchasing a product in large quantities, you can estimate that demand will be higher in the future. You can then prepare for that demand by having more products on hand. 

This method is used for products that are popular with customers, but not as cyclical. For example, if you notice that customers are purchasing a certain pair of running shoes in large quantities, you can estimate that demand will be higher in the future. 

To estimate future demand with customer behaviour, you need to keep track of the inventory at all times and make sure it’s consistent. You also need to record the sales of the product and see how customers are purchasing the product. 

If customers are buying the product in large quantities, you can estimate that demand will be higher in the future. With this method, you don’t need to be aware of the cyclical nature of demand. You can look at the customer behaviour related to the product and estimate future demand based on that. 

 

Summing up 

Sales forecasting is important because it helps businesses understand where they are now, plan for the future, and make adjustments along the way to stay on track. 

Effective sales forecasting will also allow you to identify trends and make strategic decisions to stay ahead of the game. 

If you notice that a product has trending demand, you can estimate that demand will stay consistent in the future. If you notice that a product has seasonality, you can predict that demand will be higher around specific times of the year. 

If you notice that customers are purchasing a product in large quantities, you can estimate that demand will be higher in the future.