Taking the plunge to turn your idea into a business is only the beginning of the work that goes into making your startup successful. Over time, as you’ve accumulated inventory and start to consider strategies to scale your business, learning how to do a sales forecast can reduce the risk of failure. It ultimately allows you to efficiently manage your product flow and determine if you need to invest in third-party logistics (3PL) support. If you’re new to forecasting, below is everything you need to know to forecast sales for your startup business.
What Is Forecasting?
Simply put, forecasting is the process of using the data you have available to estimate and make predictions about the future of your business. It’s important to use different forecasting methods to put together short-, medium-, and long-term business forecasts. That way you have a better picture of your business operations and the goals you’re working towards.
Why Should You Do An Inventory & Sales Forecast For Startup Business?
There’s a lot of benefits to doing inventory and sales forecasting for your startup, regardless of whether you’re operating in brick and mortar retail spaces or only online.
Forecasting can help you:
- Efficiently manage product supply.
- Ensure you have enough storage, staff, and budget for future growth.
- Prepare to handle a spike in seasonal sales and product demand.
- Create a successful fulfillment strategy and achieve customer satisfaction.
- Visualize and better handle your cash flow.
- Determine when and how much product to restock.
By forecasting for your business by product category, sub-category, and brand, you’re able to continue expanding your startup and get the support that’s crucial to handling your growing inventory. Now that we’ve covered the importance of inventory and revenue forecasting for a startup, let’s dive into what you’ll need to get started.
What You Need To Start Forecasting
To kick off forecasting for your startup, it’s important to:
- Set the time interval you’re projecting for.
- Calculate the unit cost you incur during production.
- Determine the unit price of each item you plan to sell.
- Gather information on seasonal buying trends.
- Calculate the lead time of your stock.
Once you have this information, you’re able to begin. Let’s take a closer look at the different forecast models you can choose from.
Two Inventory Forecasting Methods
Making sure you have enough inventory on hand is crucial to keeping your customers happy. With these forecasting methods, you can make predictions that help you prepare to meet future demand.
1. Naive Forecasting
This is the most basic type of inventory forecast you can do. Set a desired time frame (a month, year, etc.) and then find out how many items you’ve sold. From there, you can estimate that you’ll want to keep at least that amount in stock for that same amount of time in the future.
When To Use It:
This method is fine for a quick, monthly forecast or as a baseline to check other more complex inventory forecasts. Since it doesn’t account for other variables like market supply or consumer demand, this one shouldn’t be the only model you use for more serious forecasting.
2. Demand Forecasting
Demand forecasting is your best choice if you’re looking for an inventory prediction that does account for market variables. It gives you a more accurate idea of what’s happening and incorporates both quantitative and qualitative practices.
Qualitative methods you can use include:
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- Exponential smoothing
- Time series models
- Seasonal indexes
- Data mining
- Box-Jenkins models
You can then combine that information with quantitative data gathered from:
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- Prediction method
- Historical life-cycle studies
- Game theory calculations
- Consumer survey data
- In-house staff expertise
When To Use It:
This method is definitely well suited for making long-term forecasts about your inventory. It’s more complex since it requires a lot of time and data to create estimates. However, it provides you a much more accurate prediction than the naive method above.
Four Sales Forecasting Methods
There’s no need to feel intimidated if you’re not sure how to forecast revenue. At the end of the day, forecasting sales is simply the process of making an educated guess about your business’ growth and figuring out how that will affect your inventory supply. The calculations you make will help you work with realistic goals as you expand your sales and fulfillment operations.
Below we’ll break down four forecast models and discuss which situation they work best in. That way, you can pick the best method to create an accurate sales forecast for your startup business.
1. Intuitive Forecasting
Intuitive forecasting is a subjective method in which someone with knowledge of your sales predicts your future revenue. From there you deduce what data and assumptions are necessary to reach that goal.
When To Use It:
This method can be risky for long-term planning since it’s not relying on verifiable data. However, it’s fine to use if you need a quick estimate of your startup for short-term purposes.
2. Historical Forecasting
Historical forecasting varies from the intuitive method, as it uses historical sales data and bases calculations on the assumption that you sell at least that amount next year. If you have data on your average or estimated growth rate, you should also factor that in to reach your predicted sales forecast for your startup business.
When To Use It:
This method is great if you need to quickly calculate your sales forecast. However, it’s an isolated approach, so it’s not the most reliable. Historical forecasting assumes next year will look the same and doesn’t account for any market changes. If something shifts in the market your forecast can be rendered inaccurate rather quickly.
3. Test-Market Analysis Forecasting
Test-market analysis forecasting allows you to gauge your potential sales on a new product or service by doing a controlled rollout and then analyzing the response of consumers. You’ll collect their feedback and use it as a base to predict what sales will look like when the product is launched to the entire market.
When To Use It:
This method is helpful when you’re launching a new product. It’s certainly an accurate model to use when adding a new item to your offerings, as it allows you to gather initial data and figure out potential sales. From there you can make any changes necessary to ensure it has a successful rollout and that you have enough stock.
However, this can be an expensive type of forecasting depending on the market you’re in. Make sure your startup has the budget and personnel available to support a limited launch and gather data.
4. Multivariable Analysis Forecasting
Multivariable analysis forecasting takes the information you have for other forecasting models and combines them to give you an accurate, data-driven forecast. Depending on the analytics you have, it can be more complex to set up. The only other catch is that you must have clean data that’s accurate or it will corrupt your results.
However, it’s your choice of what to incorporate. You can combine test-market and historical forecasting or any of the other models you have information for, to create a customized forecast.
When To Use It:
This way of forecasting is potentially one of the most reliable methods you can use. It requires some time to set up since it has more data, making it more complex to calculate. However, it gives you a solid, long-term forecast you can use to make informed business decisions.
Scaling Your Business
Once your startup becomes successful, it’s hard to find the time and resources internally to keep up with larger volumes of orders. This can especially be noticeable during peak selling seasons. The last issue you need is not being able to fulfill orders in time or disappointment from your customers.
This is why forecasting is crucial. It can help you visualize what your growth looks like and put support in place ahead of time, so you don’t end up with a shortage of product. Plus, it keeps you from over-predicting and having to then deal with the expenses of overstocking.
Forecasting may also show you when it’s time to hire a third-party logistics partner to help fulfill orders, so you can continue meeting customers’ expectations. Plus, a 3PL provider can give you access to better tools that automatically track your inventory and sales data. This helps you create better forecasts moving forward and takes away some of the manual labor on your team’s part.
Seeing your startup expand quickly and need some outside support? Jay Group can help fulfill your startup orders big or small and offers state-of-the-art technology to automatically collect sales data you can use to scale your business.
