Why Forecast with Excel? - dummies

By Conrad Carlberg

People tend to think of the process of sales forecasting as a knee-jerk response to a frantic call for reassurance from some nervous, jumpy, excitable VP who’s worried about having to dust off the résumé. And often, you have some reason to believe that’s exactly what’s going on.

But there are plenty of more productive reasons to go to the trouble of gathering up baseline data, getting it into the right shape to support a credible forecast, do the analysis, and then interpret it than just responding to a VP who’s afraid the job is on the line. Here are a few of those reasons.

To plan sales strategies

If you can use sales forecasts to get a handle on either future revenues, or unit sales, or both, you can help groups like Marketing, Product Management, and Production make decisions about activities such as promotion, pricing, and purchasing — each of which influences your company’s sales results as well as its net income.

Suppose you take a look at quarterly sales results over a period of several years, and you see that during that time the sales of a particular product have been gently declining. (If the decline had been steep, you wouldn’t have to look at a baseline — everyone from the sales force to the CEO would have been rattling your cage.) Your forecast indicates that the decline is likely to continue. Is the market for the product disappearing? That depends. You need to ask and answer some other questions first.

  • Is the product a commodity? Some business analysts sneer at commodities — they’re not very glamorous, after all — but commodities can be very profitable products if you dominate the market. If you don’t dominate the market, maybe you shouldn’t be in the market for that commodity. So, have your competitors been cutting into your market share, or is the total size of the market shrinking? If the problem is the competition, maybe you want to do something to take back your share, even if that requires putting more resources into the product line — such as retooling its manufacture, putting more dollars into promotions, or cutting the price. But if the total market itself is shrinking, it may just be time to bail out.
  • How old is the product? Products do have life cycles. When products are bright and shiny, the sales revenues can grow sharply over a fairly short time frame. When products reach maturity, the sales usually flatten out. And then, as newer, better, fancier products arrive, the sales start to drop. Think streaming video versus DVD. Get Marketing and Product Management to assess whether the product is getting long in the tooth. If it is, it may be time to get out. Or, it may be smart to spruce up the product and differentiate it from the competition’s versions, in order to squeeze some more profitable revenue out of it before you give up on it. Forecasting can inform that kind of decision, although it can’t make it for you.
  • How will Sales support the product? If your company decides that it’s not yet time to abandon the product, Sales Management needs to make some decisions about how to allocate its resources — that is, its sales reps. One way to do that, of course, is to take the product out of some reps’ bags and replace it with another, more robust product. (Keep in mind that some reps prefer older products because they can use familiar sales strategies.)
  • Is it possible that the decline in sales is due more to large-scale economic conditions than to problems with the product itself? If so, you may decide to hang in and wait for the economy, consumer confidence, or the index of leading economic indicators to improve, instead of making a drastic decision to drop a product line.

There’s at least one good aspect to a product that’s entering the final stage of its life cycle: You very likely have lots of historical data on its sales figures. And in general, the more historical data you have to base a forecast on, the more confidence you can place in that forecast.

To size inventories

For example, when managing resale equipment inventories, you can reduce the size of the equipment intended for sale to customers, without resorting to write-downs. Do this by forecasting sales by product line, which helps tell which products could be expected to have high turns ratios (the speed with which the product line would sell) and buy those in quantities that increased discounts from suppliers.

Simply reducing the size of inventory isn’t the end of the story, though. Sales forecasting helps you plan just-in-time (JIT) inventory management, so you can time your purchases to correspond to when sales need to be fulfilled. The less time inventory spends in the warehouse, the less money you’re paying to let it just sit there waiting to be sold.