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While preparing budgets and forecasts for the upcoming year, finance and accounting leaders are diligently analyzing and re-checking a diverse array of factors, ranging from historical data to inflation and interest-rate projections to potential policy or regulatory changes.
Part of the effort required to compile a reliable sales forecast, this analysis also involves outreach to stakeholders across the enterprise and integration of insights and data related to the organization's own goals, capacities, plans, and resources.
An accurate sales forecast (as compared with actual sales performance during the period) is an important part of the bigger picture. Equipped with a reliable, accurate sales forecast, leaders can better manage staffing levels, production schedules, capital expenditures, and other business activities with greater confidence. Accurate forecasting is foundational for strategic agility, financial health, and customer satisfaction.
Efforts to increase overall sales forecast accuracy to as close to 100% as possible -- depending on the nature of the business and broader economic conditions -- are therefore an essential component for building a successful, sustainable business.
Tracking and managing the metric
To calculate the accuracy of your sales forecast, use the following formula:
1 - the absolute value of (actual sales - forecast sales)
actual sales
The forecast and actual sales must correspond to the same period. According to cross-industry benchmarking data collected by the American Productivity and Quality Center (APQC), top-performing organizations report that their sales forecasts are 98% accurate. Sales forecasts are 97% accurate at the median, while lower-tier organizations report 95% accuracy.
A tight spread at first blush, these accuracy rates represent billions of dollars in sales shortfalls, in some cases with negative consequences that rippled across virtually every aspect of the business. Although forecasts are never 100% accurate, missing the mark by 3% on the sales forecast means a $600,000 shortfall for an organization with $20 million in annual sales. Particularly in organizations with high fixed costs that operate on tight budgets, a sales forecast that misses the mark by 1 or 2% could make the difference between turning a profit or ending the year in the red.
Organizations with sophisticated forecasting software can generate rolling forecasts that change based on predetermined variables, but most companies create sales forecasts monthly or quarterly.
Building an accurate sales forecast requires integrated data and participation by stakeholders across the organization. Historical sales data and trends are one of the primary inputs. Finance leaders must then incorporate external factors, including the economic outlook of the country, state, and locality in which they do business. Organizations that operate and/or serve customers internationally must also examine economic circumstances abroad.
Especially in more dynamic business environments like defense, energy, or oil and gas, industry-specific variables, including policy or regulatory changes, supply-chain resilience, and federal subsidies, carry substantial weight.
Projected sales revenue should be in balance with resource levels, including staffing and marketing forecasts, to ensure sales targets are supported and realistic.
Strategies for increasing the accuracy of the sales forecast include looking upstream at data accuracy and storage. Unfortunately, data silos and disparate systems create challenges for many organizations. Gathering and reconciling data from disparate systems not only takes longer but makes errors more likely. System integration and automation of journal line items can greatly improve the accuracy of transaction data, which in turn increases sales forecast accuracy.
A data-driven organizational culture can also increase the likelihood that forecasts are as accurate as possible. Part of fostering a culture that prioritizes data-driven decisions, transparency, and continuous improvement involves making sure teams have the data and tools needed to generate reliable forecasts. Recognizing and rewarding accuracy and effort in forecasting, rather than penalizing mistakes, can motivate team members to contribute their best insights. Additionally, it's important to implement a system for regularly reviewing forecast performance, learning from mistakes, and adjusting processes accordingly.
Through empowering teams and supporting a culture that values forecast accuracy, organizations can increase their capacity to make informed decisions, manage risks, and ultimately improve performance.
Building an accurate forecast also requires participation from across the enterprise. Sales might know about new products that will likely shift demand for old products, creating a need for portfolio realignment. Meanwhile, manufacturing can provide insights about downtimes that will impact supply. When stakeholders contribute their insights to build the forecast, accuracy improves. As a result, the forecast and the decisions that stem from it will garner greater confidence and buy-in.
Over time, by improving strategic and financial planning, accurate sales forecasting strengthens financial health, putting the organization on a path to sustainable growth.