Introduction to Forecasting

If there's one thing you can be sure about when forecasting, it's that your forecast will probably be wide of the mark. But that doesn't mean forecasts - especially sales forecasts - aren't a vital tool in managing your business.

"Forecasts help you identify future problems and requirements as soon as possible, to enable you to devote time to handle those issues," explains Graham Garbett, a chartered accountant providing advice to owner-managed businesses with Garbutt & Elliott, one of the largest independent accountancy firms in the North of England. For example, armed with the information in your forecast, you can make sure you have:

•	the necessary resources - staff, production facilities and materials - to serve customers. You'll have the time to put aside money to invest in new equipment, be able to start recruiting staff so they'll already be in place when business picks up, or be in a position to drive better deals with suppliers.
•	the finance to pay for those resources, or to pay other outgoings such as that nasty tax bill
•	a starting point from which to create a workable marketing and sales strategy that will allow you to achieve better sales - and ensure that the sales you're making are profitable

You'll usually need to draw up sales forecasts on a month-by-month basis for the year ahead, and Garbett stresses that you should review and update them regularly.

If you can, start with last year's sales figures, and ask questions such as:

•	How much does each of my customers buy, and do I expect each of them to buy the same amount or more or less from me?
•	Do I expect to gain or lose any customers - and will they be customers who spend a lot with me or only a little?
•	Will I have any new sources of sales? For instance, are you launching new products, opening a new outlet, extending the geographical area your company will serve, or trying to sell to a new type of customer?
•	Will my sales vary seasonally? For example, do you make most of your sales in the weeks before Christmas? Or will your sales be affected if it's a particularly good or bad summer?
•	Will my sales be affected by market conditions, such as the market growing or shrinking, new legislation or a new competitor launching?

If you're starting a new business - or moving into an entirely new area - try and find research on the size of the potential market, and estimate what share of it you will be able to capture. Garbett also advises splitting out sales forecasts by each major product group if you sell a number of very different products. He does however warn against making forecasts over-complicated. "You want to create a forecast that's as accurate as possible, but you will need to be able to understand it and use it as a practical tool to guide your decisions when running your business. So it should be easy to see from the forecast what will be the likely impact on future sales of taking certain actions. You may also have to explain them to others, such as the bank if you're looking for a loan or overdraft."

You can use a spreadsheet or an accounting package designed for small businesses, such as Microsoft Office Accounting to use real data (like last year’s sales) to draw up a basic forecast and track actual sales figures against your expected turnover. This process also means that if you either exceed or under-achieve against your forecasts, you can be alerted quickly. An accounting package will also make it easy to pull actual sales figures from your invoice records, as well as helping you allocate costs so you can see if each of your product lines or services is profitable in its own right.

The key thing, Garbett says is to be realistic:

•	Look at last year's forecast and see how close your predictions were to your actual sales. If you were over-optimistic, tone down your expectations this time.
•	Ensure it's physically possible to do what you're forecasting in terms of product availability and staff resources - for example, a taxi can only make so many trips to the airport or a particular machine can only produce so many widgets in an hour.
•	Get input from other people - ask larger customers what their plans are - and get your sales staff or your accountant to review it and challenge your assumptions and calculations
•	Finally, while an accurate forecast will help you run your business better, don't get sucked into spending so much time trying to create the "perfect" forecast - or constantly tweaking it - that you get distracted from achieving your targets.