Developing an Accurate Forecast
It has often been said that forecasting is a waste of time. After all, it’s just a guess and as such will only generate inaccurate and unreliable information. Well, forecast accuracy is what you put in it and you can improve it. These best practices will help make the forecast more accurate and reliable.
- Prepare a monthly, 3-month rolling forecast by model or product family. Since individual models and product families yield different margins it can have a vast impact on the profitability for a given period.
- Utilize historical sales data. Sales history provides the most accurate projections. If possible, analyze 3 years of sales history to determine averages or eliminate highs and lows.
- Review outstanding quotes, projects, marketing programs and seasonality. Knowing your conversion ratio (close rate) for open quotes, timelines for large scale projects, ongoing marketing programs and market seasonality can all influence monthly sales. Staying on top of these factors can further enhance sales history data.
- Contact your customers for input. Customers can provide valuable insight into what’s in the pipeline. Take advantage of this valuable resource!
- Consider external factors that can influence sales. Economic changes, unusual weather conditions or other significant events can impact a monthly forecast.
The Significance of the Forecast
The sales forecast is an effective management tool for improving operational efficiency and increasing profitability. Properly prepared, it provides valuable financial information and insight across other departments that improves the decision-making process.
Weekly cash flow analyses are a management tool used to ensure sufficient cash will be available to sustain day to day operations. Since the forecast is a critical component of the cash flow analysis, it’s essential that the forecast be as accurate as possible. Additionally, the forecast can be used to generate a pro forma P&L Statement. By projecting income and continuously monitoring its progress throughout the period you can better control expenses or make other necessary adjustments to help maximize profitability.
Operations benefits from a solid forecast as well. If utilized it simplifies planning and scheduling, improves material flow, positively affects the supply chain and keeps inventory to a minimum while achieving on time delivery to your customers.
For the sales team, it not only keeps them current with the industry, market and customers, but serves as a Key Performance Indicator for the month.
While the monthly sales forecast requires a lot of time and work to properly prepare, the applications and benefits of it make it time well spent.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: