Sales forecasting can give a business a good idea of future profits and sales levels. Many businesses use different types of sales forecasting to predict the future of a new product, determine expansion or sales strategies, or simply analyze projected sales levels on a monthly or annual basis. There are many different kinds of sales forecasting techniques, including history-based analysis, market research, and forecasting based on analysis of similar businesses. Forecasts may be short-, medium-, or long-range, though short-range forecasts tend to be most accurate.
For an established business, one of the easiest methods of sales forecasting relies on historical data. Companies that have survived their first few difficult years are frequently able to make accurate predictions for the future based on data from the previous year. To perform a monthly forecast using historical data, an analyst will need to look at past sales records for that particular month, and see what percentage of annual sales that month represented. Understanding how the month fits into the annual sales levels can be very important, since different businesses may have different peak earnings months throughout the year.
A new business, of course, will be unable to rely on historical data. In order to come up with a sales forecast for the first few years, a newer enterprise will need to rely on external factors. One method of sales forecasting that can be useful to new businesses is competition analysis. If a person opens a shoe store, he or she may want to look at the historical sales for other shoe stores that are approximately the same size and targeted toward the same demographic. It may be helpful to look at similar stores in similar communities, rather than directly analyze regional competition, since adding the new shoe store to an existing market will often change the market.
It is important to avoid sales forecasting in a vacuum, since spending habits and demand trends rely on dozens of external factors. Using market research in sales forecasting can help give a clearer picture of sales potential by including factors like economic and demand trends. If, for instance, a small town has just gained a major new source of employment, such as a factory, spending might increase as a result of higher employment. Similarly, if a store's main product has just been judged as “out of fashion” by a large fashion magazine, sales may drop. Paying attention to external factors that can influence sales can create a more comprehensive forecast.