Forecasting sales: why it’s important and how to do it
Sales forecasting is the retailer’s crystal ball. It helps us do what merchandisers dream of – see into the future and predict how much stock you need and when. Think of this crystal ball as mostly mathematical, though, with just a sprinkling of magic (unless you can see through the mystical power of an Excel formula).
Sales forecasting is a bit like weather forecasting. It helps us to see what’s ahead and prepare so that we can weather any storms on the horizon. Storms like maybe a global pandemic, for example.
You might not like what you see in the forecast, but at least if you have an inkling of what’s coming, you can do something to prepare so that you can ride the ups and downs of the retail world as successfully as you can.
OK… but what exactly is a sales forecast?
So, we’ve established that sales forecasting is like a crystal ball or a weather forecast. Maybe it’s time to get a bit more specific.
Your sales forecast starts by looking back, showing you what you’ve sold and what stock you have left as a result. It then does the forecast bit, giving you a predicted sales curve that will help you work out what your future sales are likely to look like.
The beauty of that is that if you can ‘predict’ your future sales, you can make sure you have the right amount of stock to support them. Every retailer has peaks and troughs in their sales, but their forecast allows you to build stock for when you need it and reduce your stock holding when you don’t – a fine balance but well worth the effort!
How to work out your predicted sales curve
Working out your future sales relies on you having information about your past sales. That can give you a ‘historical curve’, either using the same product from a previous year, or a product that’s similar. This will act as a base for you to work from.
From here, you can adjust the curve into a forecast that takes into account other factors you expect to affect sales. These might be things like the approach of a major pandemic (who'd have thunk it), knowing that the date of Easter moves each year, or that you ran short of stock last year so sales figures could have been higher if you had more stock (which you’ll make sure you have this year).
This all gives you a new curve which usually shows you your sales by week (you can do it by month if you want, but weekly is best practice). And the more history you have, the more accurate you can make your forecasting.
As an example of how you might use forecasting during a global pandemic, you might see that your sales suddenly drop from your expected 100 units to 50 units. If your original curve showed that you were expecting a 20% lift next week, you can redraw your curve so that it works in the context of your new, lower sales. So whereas you were previously expecting 120 unit sales next week, you’d now know you’d expect 60 instead. It might not be the best kind of news, but at least you can see it and plan for it.
OK, but how do you use all this extra forecasting knowledge?
Well, I guess there are two main scenarios here. Your forecast might be telling you that you won’t have enough stock to meet future demand, or it might be telling you that you have too much stock. Let’s look at them in turn.
If your forecast shows you might struggle to have enough stock to meet demand…
Seeing this in advance flags up that you need more before it’s too late (i.e. before it actually needs to be sitting on the shelves!). If you see this scenario up ahead, you CAN do something. You can order more from your supplier (or make more ahead of when you need it if you’re producing the stock yourself) so that it's there when you need it.
This way, you don’t disappoint your customers because you'll have stock ready and waiting when they want to buy it, and that makes them happy. Happy customers mean brand loyalty, and we all love a bit of that.
Oh, and did I mention that if you’re selling more, you’re making more profit (obvious, I know, but important). And the icing on the cake is that all this helps you manage your cash flow effectively, staggering when you bring stock in to reflect the demand rather than all in one go.
If your forecast shows you’re going to have too much stock…
Knowing you’re likely to have excess stock means you can manage the situation to get the best out of it. For example, if you’re planning to mark an item down during the main sale period, then knowing you have more than you want means you can start discounting it ahead of the sale, at a lower percentage. This is a strategic approach that helps to protect your profit.
Equally, if you have more stock on order and due to come in, you could phase this back with your supplier so that you’re managing your cash flow (both the payment for all that stock you don’t need, and the logistical costs of holding that stock in the warehouse or storage). All that comes with a caveat though – make sure you’re still being considerate of your supply chain! You rely on them so keeping a good relationship here is key.
You might also want to think about moving commitment into another area. For example, if you haven’t had the items made yet, so you might change the fabric into a garment which is selling better, or change the colour to one that’s trending more (this is also where sales analysis comes in!).
Sold on sales forecasting?
I hope so! It can increase your sales, boost your profit, help you manage your cash flow AND keep your customer happy. If you want to start sales forecasting for your business, the Flourish Sales Forecasting Tool is a great place to start. Or, if you prefer to get a bit more help from the team, get in touch and we’ll be happy to talk!
