The Sales Forecast
Sales forecasting is an integral part of business planning. I have written on the subject of sales forecasting a number of times in the past. However, for many of us, we are now dealing with a level of uncertainty we have not encountered previously in our lifetimes. As a result, some managers are eschewing forecasting, given the volatile market conditions. For listed companies there is an added complexity to their forecasting. They are fearful that if they publicly announce their projections for the year, as they usually do, there is then a chance that their share price will be hammered if they subsequently fail to meet their targets. As a result, some have chosen not to give annual earnings estimates for 2009.
However, as a recent article in The Economist, “To forecast or not to forecast?” (28 Feb 2009) declared, ‘Precisely because peering into the future is harder today than it was a year ago, managers should be using every available means to gauge what the world could look like in the coming months and to establish targets using this analysis’.
The reasons given by managers for not planning or not forecasting are simply not tenable; added uncertainty increases the need for planning, rather than diminishing it. A recent case in Ireland serves to illustrate the difficulty people find themselves in. It was reported that the new CEO of the C&C Group (Magners Irish Cider), John Dunsmore, had issued “a thinly veiled criticism of the Magners Cider maker’s previous management by hitting out at overstocking and over investment and writing down the value of the company’s manufacturing plant. ” In this instance the forecasting was imprecise and the result was overproduction and over investment against a backdrop of declining sales.
Sales forecasting, budgeting, and business planning are vital management activities regardless of the size of the business or the level of uncertainty we face. As the above example illustrates, sales forecasts are not just for the benefit of the business plan reader, but are a means to help managers make informed decisions. Looking to the future to help make decisions is always going to be an imprecise science, but there are ways to forecast sales with some degree of probability. The key elements are to (a) identify the key factors that are likely to impact on demand and (b) then consider a range of plausible outcomes. This is, in fact, scenario planning, whereby a number of plausible scenarios are considered, discussed, and then assigned probabilities.
As I stated in my article, Planning in Times of Extreme Turbulence,
“The importance of scenario planning grows when uncertainty increases. Scenario planning is when management considers a range of plausible future outcomes ranging from a ‘small stretch of the imagination’ to the ‘outlandish’.The aim is to think through the implications for the company if certain scenarios came into effect. For example, what would happen if sales decline by 20% or if oil doubles in price in 2009? By thinking through a number of plausible scenarios, and designing strategies to deal with such eventualities, companies will be better prepared if one of the scenarios does, in fact, occur.”
As the key variables are also identified, management can then keep a much closer eye on data points to help them predict likely outcomes, i.e., implications of interest rate movements, implications of currency fluctuations, etc.
In summary, while it is tempting to conclude that forecasting and planning is pointless in the volatile economic circumstances we face, the reality is that planning is more important than ever before. It is also worth remembering that the historic view of a business plan as a formal document is dated. Business planning is an ongoing process covering cash-flow management, sales forecasting and setting milestones, which business plan software products such as Business Plan Pro can help facilitate.
Accurate Sales Forecasting
Tim Berry – Plan as You Go