Sales Forecasts

Many small manufacturers make heavy use of the third basic technique (along with the others): asking the channel what it expects to purchase in the coming planning period (quarter, year). Companies typically survey their distributors, dealers, or major customers at regular intervals to get a feel for what they plan on buying. In many fields such surveys are routine—the buyers as anxious as the sellers in getting the production numbers right so that, in the future, shortages on the one hand and pressure to buy on the other can be avoided. These types of surveys are usually conducted outside the usual "selling" context—the channel made to understand that these estimates are intended for planning production. To be sure, the channel will nevertheless feel a certain pressure. Unless there is a known shortage in a field, buyers will thus typically somewhat understate their buying intentions; they don't want to have the numbers misunderstood as commitments to buy; they hedge in the lower direction; producers in turn typically plan on slightly higher production rates, all else being equal.

The fourth technique of developing forecasts—eye-balling indirect forces—is often the most tricky and occasionally the most important. This, in the snowmobile business, for instance, is guessing at the weather, but it takes innumerable other forms. Indicators of the economy are the most closely watched: almost all businesses are affected by rising or declining economies. Hot economies lift costs of supplies and of labor—and also lift sales. Consumer durables turn sluggish in times of decline—as do capital goods bought by industry. Interest rates powerfully influence new home construction—as does the demographic phenomenon of new family for-mation—which, in turn, depends on the age structure of the population and the average age of marriage, etc. Energy and fuel prices influence virtually every sector—and these, in turn, are influenced by international events. Sociological trends are more subtle and difficult to exploit effectively. In the mid-2000s a certain and very important trend is the aging of the baby boom generation, for example, but this generation is very large and pin-pointing its immediate influence on a small business during a brief period, like the next fiscal year, is not exactly simple. The small business that at least attempts consciously to look for and to analyze such trends—using the broadly available statistical sources as well as its own experience with the public—will outperform a company that simply looks at past sales and uses these to predict future sales.

FORECASTS, OUTCOMES, AND LIMITATIONS

Well-conducted sales forecasting programs have an impact on every aspect of the business—on financial performance first of all, of course, but also on market share, channel relations, and consumer satisfaction. An accurate forecast buys the company time—and time is money. If the market is projected to experience a sharp decline and the forecast is correct, the company can scale back its production and purchases early, will have more time to adjust to these changes—and will be able to retain its place in the market with a properly priced product. The downward adjustment will be no less painful when taken early rather than later—but if taken later, it will be more costly: the company will be sitting on and required to finance a large inventory; it will have to move goods at large discounts, eroding its margins; at the same time it will bear high costs of severance from layoffs. Companies, however, are rarely able to get themselves to shrink deliberately in advance of facts clear and evident on the ground. For this reason, even very effective managements will compromise and simply scale back a little. But even that will be more adaptive than projecting lasts year's sales with a small increase.

Companies, similarly, are rarely able to believe a forecast that predicts a sudden surge in sales. Such things are rare and therefore too good to be true. But the company that has a decent sales forecasting program and dares to act on it, at least up to a point, will find itself with product in the channel when everyone else is out. It will thus garner new buyers and, if the new customers are pleased, it will gain market share as well as channel loyalties.

These two cases illustrate the benefits as well as limitations of sales forecasting. The technique works best when projected changes are relatively small. Both sharp down and up adjustments from a company's or a market's history will tend to be resisted. But those with the best techniques, combining every major approach, are likely to go farthest in the right direction and will ultimately emerge as the winners.

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