Believe it or not, many SME Manufacturers, or small businesses in general, operate without really investing much effort in creating a sales forecast. Considering the benefits that even having the most minimalistic sales forecast in place can offer these businesses, this is a pretty eye-opening situation.
It’s completely understandable how this happens. Many small business owners don’t come from a financial modeling, IT, statistics, or related background and are uncomfortable with the prospect of creating a sales forecast, thus it becomes one of those things that they intuitively know in the back of their mind that they “should” be doing, but may not really know “why” they should or “how” to get started.
Before you are going to willingly leap out of your comfort zone and attempt to build a sales forecast, you’re going to need a compelling reason to do so, so let’s get to it.
First and foremost, let’s look at a quote from the great General and President of the United States…
“Plans are useless, but planning is everything” – Dwight D. Eisenhower
Some may say the same thing about sales forecasts. People often use the excuse of sales forecasts rarely being accurate as an excuse to put off investing the time and energy into creating and maintaining them. The thing that these people miss out on, is that the “act” of creating a sales forecast is where a large part of the benefit comes.
When you and others in your organization sit down to create a sales forecast, you’ll quickly realize that it forces you to think critically about your business, obtain information and insight from sales reps, and if you have it, review order history information to articulate what you expect to occur over the next 12 months or so.
The dialogue alone that occurs in this process if often in and of itself very beneficial to getting everybody on the same page on what the direction and strategy of the company should be to accomplish the forecast.
In the beginning, this may very well be where you are at. You put together a sales forecast, you are skeptical about its accuracy, and your suspicions may be confirmed. It’s at this point that you hit a critical juncture in your journey. Do you call it a waste of time and move on, or do you seek to improve?
Why continue? What will it get me?
Continuing to improve and refine the inputs and the method by which you create sales forecasts WILL yield more accurate forecasts, and as your accuracy and competency improves, so will the benefits.
Sales Forecasts (or demand forecasts) are the lynchpin of all other planning in your organization. Failing to forecast demand severely hamstrings the ability to reap the other benefits below
Increased Revenue via Sales/Marketing
If your forecasts indicate that you have more production capacity than your forecasts, you can adjust your sales and marketing efforts to go after more business. Even if this means running promotions with lower pricing, overall profitability will increase as you utilize your capacity more efficiently.
Customer Service (Increased Revenue)
When you’re able to have a better understanding of sales via accurate forecasts, you can begin to align your production planning around the forecasts to allow for more on-time deliveries to customers which has the impact on increased customer satisfaction and account growth.
Increased Capacity Utilization (Increased Profitability)
When you are operating your facilities at higher capacities, you reduce your per unit fixed costs and drive greater profitability
Inventory Utilization
The ability to know with greater accuracy what will be sold and thus needs to be produced, you can align your raw material procurement and inventory, as well as finished goods inventory to be able to better optimize inventory levels and lower overall cash tied up in the process.
Labor Costs
As with inventory utilization, being able to more accurately plan production levels and thus supporting labor needs allows you to reduce the amount of overtime or short-term temp staff to reduce production costs and drive profitability.
How to Start
The beauty of the situation is that you don’t have to be a statistician to put a process in place to create a sales forecast. You can start with a simple excel spreadsheet where you put very basic month over month sales estimates together and go from there.
Not required, but it can be also very beneficial to have a tool that allows you to manage this process and all its inputs. This can take several forms, but a CRM system can allow your sales reps to input sales orders and/or opportunities they are working on with your customers for automatic inclusion in your forecasts. In addition, the ability to integrate historical orders via a tool like a CRM can also increase forecasting accuracy by allowing you to view historical/seasonal trends in sales and lay the groundwork to facilitating a more proactive sales process.
Just starting out, you don’t have to make any rash decisions to base your procurement or production schedules strictly on the sales forecast. Why? Because quite simply you don’t and shouldn’t have a great deal of confidence in the forecast in the beginning. You are just starting this journey and will improve your capabilities of creating a forecast month by month by building the discipline to review and revise your forecast on a monthly basis.
The process of simply considering the questions that allow you to put a forecast together is enough to get the ball rolling on realizing the benefits that come with forecasting. From there, instilling a culture of continuous improvement where you review previous forecasts to actual results, discuss and document your hypothesis for why the inaccuracies occurred and putting together a plan to fix that specific hole will allow you over a period of time to increase your forecasting accuracy and incrementally allow your forecasts to drive planning in other areas of your business and really start reaping the benefits forecasting provides.