Forecasting 101

Forecasting is not a walk in the park and it is something that many of my students frequently ask me about, with a look of confusion. When developing forecasts, reflect on the purpose and objective of the forecast. Is it to impress venture capitalists? Is it to manage the next season of inventory for a retail location? Or is it to make a decision about hiring on a consulting firm? Forecasting is important for all types of organizations, and in this post you will get the basics of what you need to know. 

Forecasting is predicting what consumers and clients may do under a given set of conditions. To be able to do this accurately, a business analyst needs to have the right information and understand how to infer meaning and recommendations at times from unconventional data. Forecasts are educated estimates and by all means are not always, or even  often, 100 percent correct. 

Some questions to ask yourself, and helpful information to have:

  • Past sales 
  • Internal growth or contraction
  • Number of sales associates/managers/executives
  • Competition (entering, exiting, increasing or decreasing promotions)
  • Economic Conditions ( happy financial times, or are we screaming back into recession? How will this influence sales at your store?)
  • Target Customer (likely behaviour, situation, needs)
  • Future trends (learn more about trends in Understanding Trends and What Your Customers Want blog post) 
  • Holidays coming up
  • Population Shifts
  • Corporate wide changes/trends/promotions 

Once you have gathered information it is time to do a short-term forecast, which is usually 1 year, then you can do long-term forecast that can be visualized between 3-5 years. 

Actual sales need to be monitored to determine the accuracy of the sales forecasts, and the more agile a company is the better able to adjust organizational behaviour and product mixes for consumer needs. 

Below are some key vocabulary for forecasting sales:

  • Stock-to-Sales ratio includes maintaining inventory at a specific percentage to sales. 
    • =  value of stock/actual sales 
    • Indicates the relationship between planned sales and the amount of inventory required to support those sales and is used to calculate planned BOM Stock levels. 
  • BOM Stock Levels - the amount of stock required to begin the month. By multiplying the stock-to-sales rtio for the month by the planned sales for that month, you can determine the inventory level needed at the beginning of the month (BOM)
    • Planned BOM inventory = stock - to - sales ratio X planned sales 

The most important thing to think about is your PL Statement (Profit & Loss Statement). What is your revenue (total sales), and subtract the cost of goods sold ( for products the cost merchandise costs, for ULLO we determine COGS at the FOB price for products; services would be human capital) to get gross profit. Calculate the operating expenses, how much does it cost to print business cards, rent space and acquire customers? Categorize the expenses that have a one time fee (many of these are fixed expenses, such as furniture, licenses, and software. What country/province/region are you operating in? What is their tax (or in many places VAT)? Apply it. Subtract Operation Expenses,  non-recurring expenses and taxes from gross profit, and voila, net revenue (aka profit!). 

 

Sales - COGS = Gross Profit - Expenses (Operating + Non-recurring) - tax % (applied to sales) = Net Revenue (Profit)

This is where business gets fun! 

I used to loath accounting, forecasting and the technology aspect of business. Now, I cannot get enough of it! It allows you to make better decision and solve problems. It is intimidating at first, but it is logical and makes sense once you have to do it to make your business survive. 

 

Luck & Light,

 

@Tara_Lorraine