The Top 10 Blunders Entrepreneurs Make in Forecasting Sales Trends
For entrepreneurs, few things hold their interest as intensely as the sales of their business. Sales, after all, is the main scorecard that shows whether a business is doing well. Past sales are the basis wherein businessmen make decisions about the future.
However, many small or inexperienced entrepreneurs fail to analyze sales trends properly. They are prone to making the wrong conclusions. You need to interpret the indicators correctly so that you can make adjustments in your planning.
Apart from knowing if your company is doing well, you need to understand how to analyze sales trends to guide your budgetary allocations. If you know the key aspects to examine, you can better forecast the inventories and manpower needed, among many other decisions that are dependent on sales forecasts.
It is not enough to know if sales are growing or if it is in decline. There are cases that an increase in sales may be considered unsatisfactory and it is very possible that a decline in sales is, in fact, a good trend. Consider the following variables in making your decision:
1. Not knowing how to give the right allowance for seasonal variation. A terrible blunder often committed by those new to the industry is to underestimate the effect of seasonal variation. What happens is that most beginners assume that the decline after Christmas sales would be moderate; they may think that a fifty percent sales decline after December is a safe allowance. The truth is that sometimes the decline can be more than ninety percent. Although all people know that the season affects sales, the problem is in figuring out how much will be the impact of the season. This is best done by getting accurate industry figures in order to make realistic estimates of the effects of the season. There are some types of businesses that are hardly affected, with less than ten percent seasonal sales variation. On the other hand, there are also ventures whose sales are so low in their off-season that they are forced to close temporarily.
2. Not knowing the impact of your price changes. If you had recently increased prices, then make sure you carefully studied the potential impact. The usual error here is the tendency to just automatically pass on the cost increases with a corresponding price increase. This may result in drastically reduced sales if you price yourself above the going market rates. In retailing, slight price increases may have no effect in the short term; but in the long run, the damage to sales may be irreversible once you have acquired the reputation of being expensive.
3. Disregarding the effect of competitor price changes and promotions. Do not presume that it will be business as usual if a competitor is going after your market with price discounts and promotions. Anticipate a likely reduction in sales to be conservative in your planning.
4. Factor in the effect of competitors entering a market. If you are successful, it will only be a matter of time before other people will try to share in your bonanza. Therefore, have enough cash reserves to withstand the sales disruption that new competition may bring.
5. Factor in the novelty effect. This is especially true with food establishments. Many people are willing to try the new food store in the mall. Unfortunately, such sales surges may be temporary.
6. Neglecting to segment your sales according to type of customers. Gather demographic and psychographic data so that you can segment your data accordingly. This information will allow you to better forecast your sales.
7. Overlooking changes in customer demand. This is the most dangerous blunder to make. If your particular product or service is going out of style or becoming obsolete, then you have to adapt or face inevitable decline. You must attempt to estimate how rapid the shift will be to other products or services.
8. Disregarding the influence of social media. Today, a large and growing number of people rely more on social media like blogs, forums, Facebook and Twitter to make their buying decisions. These are usually more trusted than the paid advertisements and so it would be smart on your part to see the current buzz about your company in cyberspace. Note that negative reviews could spread rapidly and have a large impact on your sales. On the plus side, positive reviews will increase sales just as dramatically.
9. Not using sound statistical formulas to project sales. You do not have to be a Math major to use statistical software or spreadsheets to assist your sales analysis. However, if you are allergic to terms such as multiple regression, then you could easily hire a statistics whiz to help you out.
10. Doing just one sales forecast. To make your preparations more effective you should make at least three assumptions: the first for your expected sales, a second for the worst-case scenario, and a third in case for the most optimistic prediction.
Forecasting sales is an extremely difficult task and the success rate is similar to weather forecasting as there are so many variables that cannot be controlled. Nevertheless, it is a process that every entrepreneur must undertake to improve planning and management of the business.
*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.