What is the Importance of Sales Forecasting in Financial Planning?

Importance Of Sales Forecasting July 26, 2020

Jin Hyun

Writer

Forecasting is utilized across many different industries from small businesses to corporations for tasks such as financial planning, customer success management, and supply chain control.

Decision-makers in businesses need advanced warnings of any potential issues, such as in the event of an unexpected downturn in economic conditions. Understanding the importance of sales forecasting enables them to take preemptive action to avoid losses in traffic or sales while allowing their businesses to become more malleable in adjusting to new and sudden changes.

Additionally, it's possible to spot new opportunities to increase revenue using forecasting methods. From there, businesses can formulate strategies to optimize their operations and spending habits.

Whether they need to allocate more funds to certain products in the inventory, increase efforts in marketing and promotions, or halt the process of hiring new employees, sales and demand forecasting is necessary to predict future financial situations and make more informed decisions.

Defining Forecasting

Becoming familiar with the terminology behind sales forecasting is a strong place to start when learning about the forecasting process.

Market Forecasts - The strength of sales is directly related to the condition of the market. This is why market forecasts are essential for predicting sales. Through this process, businesses make data-driven predictions on projected numbers, trends, and characteristics of their target market. As a result, they can gain a better understanding of consumer trends and produce more accurate sales predictions.

Sales Forecasting - This form of forecasting involves determining the level of future demand for specific products or services. This practice will allow managers to gain a better understanding of their cash flow as it can also collect information regarding the volume of future sales.

Labor Forecasting - It can be costly to have too many employees on hand when the level of demand doesn't justify it, or not enough labor to maintain productivity. Labor forecasting involves evaluating the cost of labor and predicting the amount of traffic a business will experience. This informs managers on how many staff members should be scheduled for a shift to optimize efficiency.

Financial Forecasting - This practice involves estimating profits, as well as a business' expenses for the month, quarter, or year. A financial forecast can clearly show whether the business has reached its KPI's for the quarter and give transparency on its performance. Comparing the current financial situation to previous years can also increase the accuracy of projections.

Cash Flow - Cash flow is the amount of money that is being transferred in and out of a business within a given time period. Therefore, a cash flow forecast reveals the amount of money a business can expect to receive and payout in the future. This process involves taking into account unexpected expenses, dips in sales, and increases in manufacturing or product costs.

Budgets - The importance of sales forecasting is especially evident when evaluating the business' budget. Creating a realistic financial plan that takes into account the results of forecasting can give a solid guide for spending throughout the year.

4 Main Advantages of Sales Forecasting

Accurate forecasting offers several benefits for business owners and managers. In addition to understanding the importance of this practice, it's also crucial to recognize how forecasting positively impacts the bottom line.

1. Smarter financial planning - The information from accurate forecasts allows businesses to better plan financially for their futures. The projections can clearly outline the peak seasons, breaking this down further to even days and hours. By planning accordingly, businesses can ensure that they have enough cash flow on hand to prepare for unexpected expenses.

2. Preventing staffing issues - Recognizing the importance of forecasting can help correct any staffing issues companies may be experiencing. By assessing the rise and fall of demand each month, day or hour, businesses no longer have to rely on naive guesswork to plan out employee schedules. Instead, managers will have a better idea of which shifts will require the most labor on hand and be able to plan ahead.

3. Developing marketing plans - Forecasting is also beneficial for developing effective marketing plans. When businesses can foresee a dip in sales, it's especially important to ramp up targeted marketing efforts. Business forecasting allows them to see where sales are lacking and then tailor promotions to fill that gap.

4. Enhanced inventory management - By investing in forecasting, companies gain the ability to enhance production management. The last thing owners would want is an overflow of inventory when sales are dipping. Accurately forecasting demand gives them the foresight to tailor the supply chain to meet the demands of specific products and services while ensuring the business has the shipping means, materials, and labor available.

Recognizing Its Importance

Regardless of the industry, providing management teams with predictions on cash flow, supply chain control, and finances are essential. This data can be especially valuable when planning finances and budgets for the upcoming year to ensure operations are kept as optimal and efficient as possible.

Luckily, decision-makers in businesses can now rely on sales forecasting software to seamlessly automate this process. After all, there is no need to navigate through complex spreadsheets when there is a simpler solution to produce reliable data specially customized to your business needs.