Retail Sales Forecasting

Retail Sales Forecasting: Part Art, Part Science

If you are like many retailers, you probably haven’t put together a comprehensive business plan since you first went into business (if you did it then!). But a carefully thought-out plan is essential to the success of your retail business.

Owners and managers who plan ahead invariably achieve more than those who don’t take the time to draw up forecasts and set realistic goals for their stores.

One of the most important forecasts you will make is the sales forecast. It requires that you make strategic decisions regarding the future of your business based on accurate information of your past performance and thoughtful projections into the future. In short, planning a sales forecast is part art, part science.

Where to Begin
The process is not as bad as it sounds. Dig out your sales figures from the past three years (if you’ve been in business that long) and note your month-to-month sales trends. You may find it helpful to summarize sales figures on a chart or spreadsheet. This will give you basic forecasting data.

Look at More Than Past Sales Trends
Past sales figures by themselves, however, don’t give all the information you need to write an intelligent sales forecast. You also must consider a multitude of other factors.

Here are some important ones to keep in mind. Each of these has probably influenced your past sales, and will affect sales in the future.

Your business’ previous sales levels.
Comparisons of similar selling periods.
Your customers’ lifestyles and tastes.
The general condition of the local and national economy.
Business conditions in your retail niche.
Changes in the competition.
Changes in store’s policy.
Changes in your store’s size, space, or product mix.
Dates of holidays, number of selling days.
Changes in pricing policies.
Changes in morale and motivation among your employees.
Advertising and promotion campaigns.
Changes in relationships with suppliers.
External conditions that might have caused more potential customers to move into, or out of, your trading area.
Establishment of goals and planning.

Think about how each factor has influenced past sales. Then think about how to work these variables into your projections of future sales.

Factoring in pricing policies
Now, let's look at an example of how to take these variables into account in your planning. These provide the “science” of forecasting.

Consider rising (or falling) prices. For example, how should you change your sales plan if you expect rising prices to increase the amount of your average sale by five percent?

In this case, you start by multiplying last April’s $40,000 sales figure by 1.05 to find the amount that will keep you even with last year’s sales.

$40,000 x 1.05 = $42,000

So, on the basis of rising prices alone, you can plan for a $2,000 increase, assuming your unit sales remain constant. Of course, that $2,000 doesn’t represent a true increase, since your own rising costs offset it. It does, however, give you the new base from which to make your other calculations.

Once you’ve figured the new base amount, you can calculate the effect of other factors, such as changes in the number of selling days, then multiply by 1.20 to arrive at a true 20 percent increase.

You’ll have to devote some time to calculating how these variables will affect your sales. Making straight month-to-month comparisons can be very misleading. Without accounting for an increase in prices, you could easily conclude that you are achieving good sales increases when your sales are actually dropping.

The Final Steps
The next step in the sales forecasting process is where it becomes an “art.” This again requires you to apply your judgment.

First, look at your projections:

Do they make sense? Do they pass the “plausibility test”?
Based on all the information available, can you substantiate the dollar figures you planned for sales?
Are they sound enough to use in planning other parts of your business?
Are they good enough for your banker?

Then, compare your forecasts to actual sales results as you see them develop.

Don’t worry about occasional minor variations.
But if you consistently over- or under-estimate your sales by 10 percent or more, you should find out what’s causing the discrepancy.
Then you can make whatever adjustments you think are appropriate.

Make sure that when you have completed this process that it all makes sense and feels right. Satisfy yourself that your forecasts are logical and complete.

Your sales forecasts are the backbone of your business plan.

Once you are satisfied your forecasts and the plan make sense on all counts, then create a couple of alternate plans based on different assumptions.
That way, when your sales results differ significantly from your plan, you can immediately switch to an alternative plan that already has been well-thought out.

You should have plans for how to react to a variety of future changes, either positive or negative. It is particularly critical to plan for a worst-case scenario, so you know some of your options ahead of time.

Having contingency plans will enable you to follow your primary plan more confidently.

Sales forecasting involves both “science” and “art.” There are preexisting formulas to help you in factoring different variables in your forecast, giving you the freedom to make sound, sensible estimations and assumptions based on those formulas.

Don’t let the process intimidate you; take advantage of it and get the best possible strategic planning for your business.