Sale Forecasting

Sale forecasting is the estimation of future sales using past data and market trends to aid planning and decision-making.

Sale forecasts are an important part of financial planning. Inaccurate forecasts can result in shortages of inventory, inadequate short-term financing arrangements, and so on.

If a company’s sales forecast misses its mark, either understating or overstating sales, there are many potential problems.

Consider Nintendo, which missed its mark. This company introduced the Wii game console in November 2006, which enjoyed runaway popularity. In fact, this game console was so popular that Nintendo could not keep up with demand. It was in such demand and inventory so depleted that Nintendo was selling the game faster than they produced them.

Nintendo missed its mark, significantly underestimating the demand for Wii. While having a popular game console may seem like a dream for a company, this product created problems. With no Wii game consoles on store shelves, other manufacturers with gaming systems with similar (but not identical) features, were able to capture some of Nintendo’s market. Also, consumers may begrudge the company for creating the demand for the game through advertising, but not having sufficient game consoles to satisfy the demand.

To predict cash flows management forecasts sales, which are uncertain because they are affected by future economic, industry, and market conditions. Nevertheless, management can usually assign meaningful degrees of uncertainty to its forecasts. Sales can be forecasted by regression analysis, market surveys, or opinions of management.