Every business owner knows the importance of sales forecasting. But forecasting is only useful if the results are accurate and reliable. Not using the right strategies or data can lead to errors, inaccurate forecasts and poor decision-making.
To keep your forecasts on the right track, make sure that you’re avoiding these five common mistakes.
Forecasting Based on Assumptions Instead of Data
One of the biggest sales forecasting mistakes you can make is to base your forecasts on assumptions instead of data.
Having a gut feeling about the market or making assumptions based on hearsay is a recipe for disaster when making business decisions.
Forecasting should be based on solid data. Past data based forecasting will deliver the most accurate results. Why? Because your forecasts will be based on historical data and based on actual figures – not assumptions.
Use assumptions and gut feelings as guides and not decision-makers. Check to see if the data supports these assumptions. If it doesn’t, then don’t use them as a basis for your forecasting.
Neglecting to Account for Seasonality and Trends
Another common sales forecasting mistake is neglecting to account for trends and seasonality. Most businesses have high and low seasons, where sales peak and then waver for some time. Market and seasonal trends can also affect sales.
Not accounting for these variables can lead to wildly inaccurate sales forecasts.
For example, if you run a summer seasonal business, your forecasts have to account for slow periods in the fall and winter. Otherwise, your forecasts will be highly inaccurate and may lead you to make poor decisions or be completely unprepared for the low season.
Failing to Involve Key Stakeholders in the Process
One important step in the sales forecasting process is to communicate the results with stakeholders. Failing to do so could lead to conflicts in the future.
Key stakeholders should be involved in sales forecasting. These individuals can provide valuable feedback and input that can be incorporated into the sales forecast.
For example, let’s say that you’re leading a sales review meeting and all key stakeholders are present. The head of the Customer Support department may chime in to make a note about a serious issue that isn’t going to be easily fixed and will likely delay closing. This problem will undoubtedly affect sales, unless it is made a priority and resolved as soon as possible.
In this scenario, had stakeholders not been involved in the forecasting process, closing delays could have blindsided the company and caused unexpected financial difficulties.
Don’t make the same mistake. Make sure that key stakeholders are involved in the forecasting process.
Overestimating or Underestimating Future Sales
Inaccurately estimating future sales will lead to inaccurate forecasts. Forecasts can only be as accurate as the data you feed them. If your estimates are off, then your forecasts won’t be reliable.
- Overestimating sales may lead to poor decisions (e.g., hiring new employees when you really don’t have the funds to do so)
- Underestimating sales may keep you from reinvesting your surplus in growth
It’s important to ensure that you’re using the right data to estimate your sales, preferably historical data. But estimating sales is a bit more complex than simply looking at the past. Market trends and seasonality will also come into play.
Make sure that you’re taking the time to create accurate future sales estimates.
Underestimating the Impact of Inaccurate Forecasting on Your Business
Many businesses underestimate not only the importance of sales forecasting but of accurate forecasting.
The impact of inaccurate forecasting can be wide-reaching and impact virtually every department in the business.
For sales forecasting, inaccuracies can lead to the company:
- Spending too much on inventory
- Not having enough inventory to support a surge in customer demand
- Investing in growth when it won’t have the cash flow to support it
Inaccurate forecasting can wreak havoc on a business’s finances. Using the best practices for forecasting can help prevent this problem.
In Conclusion
These common mistakes can lead to inaccurate forecasts that affect a business’s finances and can lead to cash flow gaps. Using past data-based forecasting and incorporating the best practices into your forecasting method can help you avoid making these mistakes.
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