If we could forecast the future accurately, most of us would spend our lives at a racetrack or casino rather than at work. But forecasting the future is something we all have to do as business owners either to set internal goals, to obtain additional financing and for other reasons. Forecasting is, however, one of the most difficult and frustrating things that we have to do and few things cause as much anguish and soul searching as sales forecasts.
So, for a start, forget trying to predict the future and focus on using "informed judgment". Many attempts at forecasting fail because those involved, from sales reps. to business owners, don't have the detailed knowledge of their market, their competitors, their customers and potential customers that is essential for making good estimates. They are less than fully informed when they make their judgment of what will happen and that's a failure of work and effort, not of technique.
We also forget that we can only control some of the things that have an impact on our forecasts, for example, the number of dealers we approach, the effectiveness of our promotional tools and our price strategy. There are others factors which directly affect the odds of our success but which are beyond our control. Some are known and can be reflected in the assumptions on which are forecasts are based, for example the price of crude oil, low pay scales for offshore labour. But there are others to which we can only react, for example an unexpected outbreak of SARS.
The most common mistakes, in my experience, are that we overestimate how much we can sell and how quickly we can sell it. Avoiding those mistakes is hard enough when estimating how much more our existing customers will buy of the products they currently use. Adding any "new" dimension just adds complexity.
Forecasting increased sales to current customers should be easy. We either increase the volume of existing products, start selling them products they don't currently buy and/or increase prices. But if the account managers don't have the skill - or don't make the effort - to get as much information about, for example, what is happening in the customer's own business and how that affects our offering to them, we will be trying to forecast with less than detailed knowledge. So, we can't make informed judgments - fertile ground for overestimating what can be sold.
What happens if, for example, we're going to start selling an existing product in a new geographic market? If our competitors already offer a product in that region/province/country, how much of our sales will come from the market share we'll take away from them and how much will come from the continuing growth of the market? To begin, we must understand how our product quality, lead times and prices compare with our competitor's and how much it will cost to get our message heard over their promotional "noise". We can do some simple, inexpensive research to gain the detailed knowledge required to answer those questions.
When it comes to taking market share away from competitors, we have to make 2 sales. Firstly convince the customer to stop buying from our competitors and then convince them to buy our product - which is untested in this marketplace. But for most business owners, who are natural optimists and driven, type 'A" personalities, it is not difficult to underestimate how long this will take!
Estimating the sales that will come just from market growth may seem easy by comparison. All we have to do is to convince the remaining distribution channels to sell our widget - make 1 sale instead of two (always assuming our competitors have left some distributors for us). But estimating how long our new distributors will need to ramp up requires information to help us assess how effective the distributors will be. We also want our share of the market to grow at least as quickly as the market itself. The future market growth rate can be forecast using the actual growth rate for the last 2 or 3 years (either as is, or adjusted upwards or downwards). The rate at which we grow depends on how good a Marketing plan we have. Developing an effective Marketing plan requires informed judgment. Anything less, combined with that optimistic approach of the entrepreneur, will, once again, result in overestimates.
Here's a final piece of advice. Even if you've worked hard and spent time gathering detailed knowledge which you used to make informed judgments, don't stop when you develop a "final" set of numbers. Unless you've been unusually pragmatic in arriving at this first forecast, call it your best case. Now think of the things that are most likely to go wrong, assume that they will, change your spread sheets accordingly and call that your worst case. Finally, it's unlikely that everything will go against you but it's equally unlikely that everything will go your way so take a third approach, which avoids either of the extremes, run the numbers again and call that your most likely case.
© Copyright ProfitPATH, a division of JDS & Associates Inc., 2006
Before becoming CEO of the Canadian subsidiary of a multi-national corporation, Jim gained over 25 years' business experience in major corporations (including subsidiaries of Pitney Bowes, Xerox and ITT) in Canada and Internationally. His orientation and expertise saw him spend much of his time starting and growing new or existing businesses. Since 1997, he has specialized in helping the owners of small and medium size enterprises, successfully achieve their growth objectives. Three of the companies with whom he has worked have received Business Achievement Awards. In 1995, Jim completed an MBA in the Executive Program at the University of Toronto, finishing on the Dean's List. He also holds a Bachelor of Commerce degree from the University of South Africa. Visit Jim's web site http://profitpath.ca/ for more information.