The single most important element in the forecasting process is the Sales Forecast. Generally, Sales drives everything else; it is what determines the expense spending plan. If the company is a manufacturing company, the sales forecast will drive the production plan.
There are several different ways to approach Sales Forecasting. Typically it starts with the Sales Department figuring out how much product they can sell in the following year. Sales people are naturally optimistic by nature, usually overestimating achievable sales. There are several factors that can impact the forecast:
Product availability, technical issues and economic climate to name a few. All of these factors can be unpredictable and outside of anyone’s control. If there are new products being introduced during the year, there are delays that can happen that may not be readily apparent during the sales forecast process. All of these factors affect why our jobs as financial consultants are to take the sales forecast and validate. Be prepared for substantial resistance to lowering the sales forecast, however.
Sometimes the forecast may just seem unachievable; it is our job to inject some realism into the equation. There are different methods to validate the sales forecast. One is to review the sales quotas for each sales person and weight their performance based on historical results. Another method is the rule of three. You always assume that your sales force will fall into 3 categories; a third will over perform, a third will just meet expectation and a third will underperform. Another method is to look at historical growth patterns and extrapolate forward or to look at the growth in the industry that is applicable and assume the company will grow at the same rate. Best practice is to use several of these methods in an effort to see if there is a consensus between the different types.
The sales forecast has a tremendous impact on many business decisions; not the least of which is staffing levels. In order to support a company’s sales objectives, there is a considerable amount of support staff and expense spending that is directly related. There are many peripheral departments that are directly affected by the sales budget. Take the marketing department. The marketing department includes the advertising budget, which can fluctuate wildly depending on the business strategy to the company adopts to support the Sales Forecast. Spending time up front on the Sales Forecast can ultimately save the company from making some very expensive mistakes.