Sales & Inventory Forecasting For Small Business

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Table of ContentsSales & inventory forecasting overview1.1 What is sales & inventory forecasting?1.2 Why is sales & inventory forecasting important?12How to create forecasts for your business2.1 How to start a sales forecast2.2 Key sales forecast metrics342.3 How to start an inventory forecast2.4 Key inventory forecast metrics5673.2 Types of demand forecasting8Demand forecasting3.1 What is demand forecasting?Supply and demand4.1 Forecasting case studies: successes4.2 Forecasting case studies: failures9104.3 Common supply and demand issues11Using the right tools5.1 Sales & inventory forecasting tools12Sales & inventory forecasting for small business2

1.1 What is sales & inventory forecasting?Sales and inventory forecasting are necessary tools for growing anybusiness xperiencePlan forDemandWhat is sales and inventory forecasting?Sales forecasting is the process of making an informed estimation about your futurelevel of sales over a defined period. Accurate sales forecasting is critical to smartbusiness management, as it allows you to plan for demand and effectively manage cashflow and inventory.Inventory forecasting is the process of predicting when and how much you’ll need toorder. It uses a combination of factors such as previous sales history, trends in sales anddemand, and the average lead time for receiving new inventory to determine the optimaltime to reorder stock.123NewcustomersSales & inventory forecasting for small business1

1.2 Why is sales & inventory forecastingimportant?Sales forecasting helps with business planning, budgeting, and goal setting. Once youhave a good understanding of what your future sales could look like, you can begin todevelop an informed procurement strategy to make sure your supply matches customerdemand.Through sales forecasting, you can also identify and rectify any kinks in the sales pipelineahead of time to ensure your business performance remains robust throughout theentire period.When it comes to inventory management, most eCommerce business owners knowall too well that too little or too much inventory can be detrimental to operations.Buying too much inventory can have a significant negative effect on cash flow andearning potential, while having too little stock can mean customers are unable to makepurchases, resulting in decreased sales.Accurate inventory forecasting can have a big impact on the inventory managementprocess and makes sure stock levels remain at an optimal level. Keeping just enoughinventory on hand can also reduce tax liabilities by lessening the amount that needs tobe subtracted from deductible expenses – meaning you’ll have more cash to invest backinto your business.Read more about growth hacking your business with sales and inventory forecasting.Sales & inventory forecasting for small business2

2.1 How to start a sales forecastAlthough the exact sales forecast process will be unique to your business,follow these four fundamental steps and you’ll be on the right track tomaking accurate sales projections.1Write well-researched, relevant, and engaging contentIf you sell across more than one platform (on your website and Amazon, forexample), you’ll need to define each sales channel so that you can start tocreate a sales forecast that is accurate for each platform you sell on.Use keywords wisely2If you have accurate information on sales over the last year, start by using thisdata to make educated guesses about the level of sales you’ll be making in thefuture. Take note of periods of seasonality or variability in sales that deviatefrom the norm. These become critical in planning for your future.Use internal linking3Although you won’t have any previous sales data for new products you plan onintroducing, it’s worth looking to similar type products as a guide for how thosenew products may perform. For example, if you sold a printed t-shirt last year,you might use the historical sales data for that t-shirt to predict sales for a newt-shirt at a similar price point.4Optimize metadataYour sales forecast will allow you to plan more effectively if you includeprojections up to at least 12 months in advance.Sales & inventory forecasting for small business3

2.2 Key sales forecast metricsOnce you have the basis for your sales forecast in place, you should defineand track the following metrics over the entire forecast umber of eachproduct sold on amonthly basis, perchannelPercentage of salescoming from newcustomers, perchannelPercentage of salescoming from repeatcustomers, perchannel456The total made from allproducts soldThe total cost to youof all products soldMonthly revenue minusmonthly cost of goodssoldMonthlyrevenuesMonthly costof goods soldMonthlygross marginTo make life easier, consider using a forecasting model like TradeGecko’s free Sales &Inventory Forecast Template, which automatically populates total sales revenues andmargins based on your initial sales-per-product inputs. This valuable template savestime and ensures the data you’re seeing is accurate – plus it generates graphed reportsto make understanding the data easier.Sales & inventory forecasting for small business4

2.1 How to start a sales forecastWith inventory forecasting, you can begin to build a procurement strategyso that you have just enough stock on hand to meet sales demand –resulting in a high inventory turnover rate and low inventory holding cost.Define your basedemandIdentify upcomingtrendsPlanning for inventory relieson knowing how many salesyou can expect to make in thefuture. Once you have yourbase sales data in place, startby determining the number ofproducts you’ll need in stock tomeet demand.Look to the past period’sinventory fluctuations, includingany stock-out or overstockperiods, and take note ofany likely future variability ininventory.Determine yourproduct lead timeCalculate yourreorder pointTo make sure you have enoughstock on hand when a sale ismade, work out how long it takesfor you to receive stock after apurchase order is made.Use the reorder point formulato calculate exactly when it’stime to place an order for a newshipment of products.Sales & inventory forecasting for small business5

2.4 Key inventory forecast metricsAlong with your sales forecast metrics, you should also outline and trackthe following inventory metrics:123Productlead timeSalesperiodCosts paidper purchaseThe number of monthsit takes from placinga purchase order tobeing ready to sell eachproductHow many months ofsales are expected fromeach productWhat percentage of thecosts of products arepaid when a purchaseorder is placed456How many daysyou have to pay theremainder of theunpaid inventory costsThe amount of eachproduct you need tokeep in stock, based onsales forecasts*The cash needed tomake eGecko’s inventory and sales forecast tool automatically populates appropriateinventory purchases and the cash required to make those purchases based on your datafrom the first four metrics.Sales & inventory forecasting for small business6

3.1 What is demand forecasting?Smart demand forecasting can have a significant positive impact on theoperations, reputation, and sales of any business.Demand forecasting refers to making estimations about future customer demand usinghistorical data and other information. Proper demand forecasting gives businessesvaluable information about their potential in their current market and other markets, sothat managers can make informed decisions about pricing, business growth strategies,and market potential. Without demand forecasting, businesses risk making poordecisions about their products and target markets.Why is demand forecasting important for businesses? It allows businesses to more effectively optimize inventory, increasing turnoverrates and reducing holding costs. It provides insight into upcoming cash flow, meaning businesses can moreaccurately budget to pay suppliers and other operational costs. Anticipating demand means knowing when to increase staff and other resourcesto keep operations running smoothly during peak periods.Sales & inventory forecasting for small business7

3.2 Types of demand forecastingMost demand forecasting techniques fall into one of three basic categories:Qualitative forecastingQualitative forecasting techniques are used when there isn’t a lot of data available towork with, such as for a relatively new business or when a product is introduced to themarket. In this instance, other information such as expert opinions, market research,and comparative analyses are used to form quantitative estimates about demand.Time series analysisWhen historical data is available for a product or product line and trends are clear,businesses tend to use the time series analysis approach to demand forecasting. Atime series analysis is useful for identifying seasonal fluctuations in demand, cyclicalpatterns, and key sales trends.The time series analysis approach is most effective when used by well-establishedbusinesses who have several years’ worth of data to work from and relatively stabletrend patterns.Causal modelsThe causal model is the most sophisticated and complex forecasting tool forbusinesses because it uses specific information about relationships between variablesaffecting demand in the market, such as competitors, economic forces, and othersocioeconomic factors. As with time series analysis, historical data is key to creating acausal model forecast.Read more about demand forecasting and how it can help your business.Sales & inventory forecasting for small business8

4.1 Forecasting case studies: SuccessesIKEAIKEA’s inventory management strategy relies on a proprietary inventory system thatprovides logistics managers with point-of-sale (POS) data and warehouse managementsystem data. IKEA’s strategy outlines how much inventory comes into the store throughdirect shipping and from distribution centers. From this information, the logisticsmanager can accurately forecast sales for the following couple of days and orderproducts to meet the expected demand. If the sales data doesn’t align with the projectturnover for that day, the manager manually counts the products in stock.Here, we can see an excellent example of forecasting technology aiding businesslogistics, with a manual process acting as a safety net to ensure complete accuracy.ZaraZara’s just-in-time production approach means they design, manufacture, distribute, andsell clothes within a two-week period. They keep a large amount of production in-house,so they can be more flexible in their production cycle and control more of the supplychain and manufacturing process than competitors.So, how do they manage such an efficient production cycle? Sales and customerfeedback data is sent back to Zara designers as soon as it’s received so that adjustmentscan be made quickly and in line with customer demand. Zara also have extra laborcapacity at all times so that they can meet demand as it shifts – supporting thecompany’s lean inventory management approach.Sales & inventory forecasting for small business9