Chapter 10 – How To Forecast Anything

Overview

The content of this chapter should be self-evident from the title: How to forecast anything. Sales are used as the example, because forecasting anything in business usually boils down to forecasting sales and estimating everything else. The distinction between a forecast and an estimate is important. Also, it is usually easier to forecast in volume terms (quantities) rather than values. Accordingly, this chapter examines forecasting volumes. Subsequent chapters discuss quantities and the important topic of getting from quantities to revenues and net profit.

Mastering forecasting

If you can follow these steps, you can forecast sales:

• Collect monthly sales figures for the most recent three years. 1
• Identify blips caused by one-off special factors such as sales promotions. 1
• Use a spreadsheet to identify a trend. 1
• Identify any seasonal pattern. 1, 2
• Think about the economy, the industry, the market, the company and the products or services and then use judgement to estimate average monthly sales for the year ahead (i.e. project the trend judgementally).
• Add in the seasonal factors. 2
• Add in an allowance for planned promotions and one-offs.
• Recombine the figures to produce a forecast.
• Identify cyclical effects. 3
• Identify cause-and-effect relationships which add rigour to your forecasting. 3

Notes
1 The first four steps were covered in the previous chapter.
2 If you are certain there is no seasonal pattern in your sales you can skip steps 4 and 6.
3 If you have more time, you can analyse the patterns more thoroughly and look for the business cycle and cause-and-effect relationships that help add rigour to the forecasts.