Situation: A company is developing new forecasting metrics for both sales and revenue. The immediate future does not look robust, and they are concerned about mid-term future revenue. Ideally they want to extend a 3 month forecast window out to 6 months. What is an effective methodology for forecasting revenue out 6 months? How do you forecast sales and revenue?
Advice from the CEOs:
- Get your team together and gather impressions on the direction of business through the end of year. How many see sales going up, staying the same or declining through the end of the year. Discuss the rationale behind each member’s estimate so that you fully understand their thinking and what metrics each sees as important to their forecast. Work to make the estimates and metrics as rigorous as possible.
- Based on the metrics discussed, develop an algorithm that you can monitor on a monthly or quarterly basis, depending upon your needs.
- As you develop your algorithm, test it against past sales forecasts and history. Can it accurately plot past performance based on the metrics that you had at the time. If not, what needs to be adjusted or better understood.
- Do you ask clients for forecasts of their purchase needs and do you track the accuracy of their forecasts? Weigh their responses by the quality of their past predictions.
- As an alternative to trying to predict demand, assemble your resources to fit the needs of your market and customers and arrange your resources for flexibility.
- Look at industry resources. How far out do experts in your industry claim to be able to forecast demand and sales or purchases? How reliable are these forecasts? What can you learn from this exercise that will improve your own forecasts?