Sales forecasting: It's hard enough to get it right without all the ways we get it wrong. It was on my mind over the long holiday weekend, and in this case, it wasn't a particularly cheery back-of-the-mind thought. My company's recent sales reflect the economic downturn.
Not cheery, perhaps, but now more than ever, managing your sales forecast is really important and very much misunderstood. Most people fear forecasting. They think some expert should do it. Visions of econometric models and weighted moving averages dance, devilishly, in their heads.
So why do people hate forecasting? It's mostly because of myths and misunderstandings. Such as, among others, these three:
Myth 1: It's About Accurate Forecasting
Not really. We're all just human, so we don't predict the future all that well. What's much more important is structuring a forecast so we can track results—make it match your accounting input—and then following up. Structure it for tracking, then track it, and then, after review, make the management decisions.
The great loss is how many forecasts never produce the second step. No wonder people disrespect forecasting. Without the following up, there's very little value.
Think of a forecast as a route on an electronic map, and the process of comparing actual results with the original forecast as the GPS technology that places your exact location onto that map. The map alone isn't nearly as effective as the combination.
Myth 2: It's for Experts
Again, not really. In the real world, forecasting is a matter of good educated guessing in rows and columns on a spreadsheet. Real people, the ones who run the business, think about what they can realistically expect.
I paid my dues with more than three years as a professional market researcher and more than 20 years in business planning. I've written about sophisticated techniques, including smoothing and weighted moving averages and econometrics, in some books that are old now. Technical analysis isn't what makes forecasting work. Common sense and frequent review make forecasting work.
Myth 3: You Can Manage Without it
Managing a company without sales forecasting—the forecast, the actual results, and the management that follows—is about as smart as driving a car without a steering wheel, or maybe I should say with your windshield covered in black paint.
Of course there are always exceptions, but most of small business right now is dealing with sales less than planned. And planned sales usually drive planned spending. So this is not a good thing.
That's where the management comes in.
Tim Berry is president and founder of Palo Alto Software, founder of bplans.com, and a cofounder of Borland International. He teaches starting a business at the University of Oregon. He has written books and software including Business Plan Pro, published by Palo Alto Software, and The Plan-As-You-Go Business Plan, published by Entrepreneur Press. He has a Stanford M.B.A. degree and degrees with honors from the University of Oregon and the University of Notre Dame. He blogs at Planning Startup Stories and Up and Running.