Managing a business is a little like running a ship. As the ship's captain, you need to keep your eyes on the horizon to plan your next move. If there are storm clouds gathering, you must secure the ship's cargo and warn the deck mates to take cover below. If there are rocky waters ahead, you have to ask your crew to stand watch to help you nĀavigate safely to the other side. If the next leg of the journey is going to be long, you need to stock up on food and supplies before leaving port. In business, there's less chance of losing an employee to scurvy, but it's equally important to plan ahead and keep your eyes on the horizon. And the best way to plan for the future is to carefully analyze trends from the past. This is especially true when predicting future sales of a product or service.
It's a tricky job, because so many different factors can affect future sales: economic downturns, employee turnover, changing trends and fashions, increased competition, manufacturer recalls and other factors. But there are several standard methods that can produce consistently accurate sales forecasts from year to year. Without sales forecasts, it's very difficult for you to steer the company in the right direction. You wouldn't know that the spring is always the slowest season, so you'd invest too much in inventory that would just sit on the shelves. You wouldn't pay attention to industry analysts who predict a robust growth in holiday sales, and you'd lose potential customers to the competition, which doubled its holiday sales force and marketing campaigns. Exactly how important is sales forecasting to the sound financial planning and management of a business? And what are some of the methods and technologies that ensure the most accurate and dependable forecasts?
Read on to find out more. It's what helps you pay employees, cover operating expenses, buy more inventory, market new products and attract more investors. Sales forecasting is a crucial part of the financial planning of a business. It's a self-assessment tool that uses past and current sales statistics to intelligently predict future performance. With an accurate sales forecast in hand, you can plan for the future. If your sales forecast says that during December you make 30 percent of your yearly sales, then you need to ramp up manufacturing in September to prepare for the rush. It might also be smart to invest in more seasonal salespeople and start a targeted marketing campaign right after Thanksgiving. One simple sales forecast can inform every other aspect of your business. Almost all new businesses need loans or start-up capital to purchase everything necessary to get off the ground: office space, equipment, inventory, employee salaries and marketing.
You can't just walk into a bank with a bright idea and lots of enthusiasm. You need to show them numbers that prove your business is viable. In other words, you need a business plan. A central part of that business plan will be the sales forecast. Since you won't have any past sales numbers to work with, you'll have to do research about related businesses that operate in the same geographical market with a similar customer base. You'll have to make concessions for the difficulty of starting from scratch, meaning that the first few months will be lean. Then you'll need to convince the bank that your business has fresh ideas that will eventually outsell the competition. All of these ideas need to be expressed as numbers -- losses, profits and sales forecasts that the bank can easily understand. As your business grows, sales forecasts continue to be an important measurement of your company's health. Wall Street measures the success of a company by how well it meets its quarterly sales forecasts.
If a company predicts robust sales in the fourth quarter but only earns half that amount, it's a sign to stockholders that not only is the company performing poorly, but management is clueless. So what are some of the standard methods for creating a sales forecast? Does it require a lot of complicated math? Find out on the next page. The hard part is maintaining the detailed and accurate financial records needed to make those calculations. The simplest sales forecasting method is an annual sales forecast. For many businesses, sales fluctuate with the seasons. If that's the case, then you can break down your sales forecast month by month. The first thing you have to do is analyze the past few years of sales figures to calculate what percentage of the year's total sales are made each month. In January, for example, you might make 5 percent of your total annual sales, but in June you make 20 percent.
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