How does a business forecast?

The process begins by looking at the current situation of a company, industry and market.
The next step is to forecast future performance based on certain factors such as economy,
competition and industry trends. After that, businesses follow different steps to analyse data,
both past and present and to make decisions like business development plans or marketing
strategies for the future.

Gathering data in preparation for forecasting in business

Business forecasting uses data gathering to prepare a forecast in the following manner:

Choosing data points

This means identifying key factors in the business that have a significant impact on sales,
expenses, revenue and profits. Data points used in forecasting often include market trends
and demographic and financial data. They use digital information, including social media
follows, web page visits, course registration and attendance, completed surveys and
successful and abandoned cart information.

Choosing variables and a data set

To forecast, you would choose which variables to use from the data points and how many.
For example, if you're analysing website shopping carts, the data points could be the numbers
of abandoned carts versus successful purchases. The variables would be the demographics of
the users and the items added to the carts that were successful or abandoned.

Then you can decide what is an ideal data set from which to collect this information. In this
case, the data set would come from the page that contains the cart and a spreadsheet might
store the information. Many website platforms have built-in analytics programmes that can
record the numbers of successful and failed purchases, user demographics and the store items
that interest consumers.

Business forecast methodology

Forecasting methodologies use data to help a business make predictions about future events
so it can plan strategically. Below are the steps used in business forecasts:

Forming a hypothesis

After selecting the data points and variables, you would form a hypothesis about the
information you've collected. To do this, indicate what you think the data is saying about the
future. To use the shopping cart example, you have roughly the same type of T-shirts that are
successfully purchased and abandoned in the same numbers. So you hypothesise that the
issue about the final purchase is a demographic factor.

Choosing forecast models

It's key that the variables used in the model are relevant to your hypothesis. For you to
explain your hypothesis to stakeholders using variables, visualisations can help. There are a
variety of statistical models used in this process, including the regression model, which
analyses data and estimates the relationships between variables. For example, to model your
shopping cart, you can decide on visualisations that show the numbers of a few demographics
that successfully purchase T-shirts of a particular kind versus the same demographics that
abandon their carts.

Analysing data

Once you have chosen your data, formed a hypothesis and chosen the modelling methods to
use, you can analyse the data. You can do this by choosing the best parameters for the
models, calculating errors and incorporating uncertainty. You can identify any problems that
present and tweak variables according to your hypothesis.

During your shopping cart analysis, you conclude that one particular demographic purchases
more T-shirts because of the lower shipping costs for their area. The other demographics are
abandoning the cart because of higher shipping costs. Your forecasts predict this might
continue to be the case, so you market more heavily to the group that is purchasing and lower
the shipping charges for the other groups to sell more to them.

What is data analysis?

Before you learn how to analyse data, it's essential to learn the definition of data analysis.
Data analysis is the process of converting facts and statistics into simpler information useful
in business decision-making. The primary aim of data analysis in a business may be to get
information about how it is performing in different areas. A data analyst may work with
different company departments, such as marketing, investment and finance. A data analyst
can use various data analysis methods, depending on the goal of the analysis and the nature of
the business.

Here are examples of different data analysis methods:

 Descriptive analysis: Descriptive analysis describes the basic features of a data set.
When an analyst describes a data set, they may use values such as mean, median,
mode, percentage, range and frequency.
 Diagnostic analysis: This may involve determining the cause of a trend or event. For
instance, the company is able to analyse customer details to determine why a certain
product is popular.
  Predictive analysis: Predictive analysis may try to predict occurrences in the future by
examining the past. For instance, the company can analyse revenue over a period to
predict future revenue.
 Prescriptive analysis: This is an analysis technique that allows the company to create
plans after analysing a data set. For instance, it can perform a prescriptive analysis to
determine the optimum product price required to increase the profit margin.

How to Analyse Data

Here are five steps that can help you analyse data:

1. Set objectives

The company's objectives may determine how the business conducts the analysis, what tools
the company uses and the type of analysis method. The goals may also help the analyst
understand what type of data to collect. For instance, if the company is analysing the
effectiveness of an ad on its website, then the data may provide information about the number
of website visits, number of clicks and conversion rates.

2. Decide on the parameters

It may be essential for the company to determine how to assess each objective at this stage.
For instance, if the company is evaluating customer satisfaction, useful parameters may
include customer retention rate, number of complaints over a specific period and number of
active customers. The parameters may also determine what tools the company can use to
collect data.

3. Collect the data

The company can divide the data into two forms: quantitative and qualitative data.
Quantitative data uses numbers, while qualitative data involves descriptive information. The
objectives of the analysis can help the company decide whether the data is qualitative or
quantitative. This can also determine how the company collects the data. For example, it can
count quantitative data and perform relevant calculations. With qualitative data, the company
may analyse the data and group it accordingly.

An analyst may use various tools in the collection process. The data analysts' tools may
include online surveys, person-to-person interviews, company emails from customers, social
media data and questionnaires. The type of tool may depend on the data. For instance, social
media analytics software may be useful for the company to get data about social media users.
It may be important for the company to use multiple tools for effective data collection.

4. Analyse the data

Data analysis may involve interpreting the data and creating conclusions. Depending on the
data type, the business can use tools, such as spreadsheets and web analysis software, to
interpret data. It may be essential for the company to create a data analysis team to conduct a
proper analysis. This team may consist of a professional data analyst, a statistics professional
and relevant company employees. The analysis process may also involve performing
calculations of qualitative data. A business may choose to calculate values such as the mean,
mode and median.

5. Present the data

Learning how to present data can allow you to create presentations that are easy to
understand and guide company decisions. You may decide to present the data using charts,
animations, written reports and tables. If the presentation is verbal, it may be important for
you to practice presenting in front of a live audience.

Benefits of conducting data analysis

Here are reasons it may be beneficial to learn data analysis:

Improves marketing strategies

An analysis can show the type of strategies used, the number of new customers gained and
the revenue generated. This may help the business decide the most effective strategies and
how to improve them. Data analysis may also involve assessing the company's consumers.
This allows the business to learn the customers' shopping behaviours and preferences.
Learning about its clients can help the company create ads relevant to the consumer. For
instance, if the company targets young adults, it may be critical for the ad to be entertaining
and informative.

Guides business choices

A company may make predictions about future trends in customer behaviour through data
analysis. This may allow the business to create new products and services that are likely to
suit the customers' preferences. For instance, if the business identifies that a certain car brand
is becoming popular, it can start selling that car's spare parts in anticipation of when it
becomes even more popular. This could lead to the company's strategies remaining relevant
for longer.

Maximises profits

Data analysis may help the business evaluate profit and profit margin issues. Such
information can help the company determine which strategies lead to greater profits. With
this information, the business can change aspects, such as product pricing, to increase
company profit.

Improves product and service delivery

The information from data analysis may help the company assess the performance of its
processes and products. Using this information, the business may decide how to improve
these systems and whether they're relevant to the customer. For instance, the company can
conduct a survey to determine the satisfaction rate of customers who have experienced the
business's returns process. If the satisfaction rate is low, the company can improve the
process.

Skills for data analysis

A wide range of skills may be essential for collecting and analysing data. Here are some
skills that may be important for data analysis:

Mathematical skills

An important part of data analysis may involve performing mathematical calculations.

Developing mathematical skills may also help you perform the analysis accurately,
improving the quality of the data analysis process. Mathematical skills are also essential for
you to use analysis software effectively. For instance, you may use mathematics to create
formulae on spreadsheets.

Computing skills

Data analysis may involve the use of computer applications. It may be necessary for you to
learn basic computer skills, such as typing, data input and common computer applications. It
may also be important for you to learn how to use programming languages. In some cases,
you can use your coding skills to create software to analyse a specific set of data.

Communication skills

The data analysis process may involve working with numerous company professionals. It
may be important for you to have good listening and speaking skills to make the analysis
process more efficient. Communication skills may also apply during the presentation of the
results of data analysis to supervisors and other employees.

Creativity and design skills

During the presentation of the results of data analysis, an interesting presentation may be
important to help you communicate effectively. Creativity can help you decide how to create
informative yet entertaining presentations for the audience. Design skills may help you create
useful and easy-to-understand charts.

Focus skills

The data analysis process may involve long periods of evaluating large amounts of data. It
may be essential for you to practice focussing for long periods to analyse data accurately.
Being able to focus can also allow you to evaluate data in a more detailed manner. This can
help you spot inconsistent data and patterns, which can affect the analysis results.

What is qualitative business forecasting?

Qualitative business forecasting is the study of the economic and social activities of a
company. Qualitative forecasting doesn't just consider financial data but also examines
factors like customer reviews that are relevant to understanding the ultimate success or failure
of a particular product. The Delphi method aids qualitative forecasting:

Qualitative forecasting and the Delphi method

The Delphi method is a forecasting technique that involves asking a panel of experts to
estimate the probability of a particular outcome and then analysing their responses. You
would gather opinions through different platforms like online surveys and polls. You might
categorise the results differently, based on the types of questions asked, as multiple-choice
responses might yield slightly different conclusions than written answers.

Business forecasting with financial data analysis

Financial data analysis is a process that uses different statistical tools to explore business data
from different perspectives. The main objective of a financial analyst is to analyse the
complex relationship between variables in different contexts, improve business performance
through insight and provide recommendations for making changes in current or future plans,
budgets, forecasts and policies. Business forecasting helps financial analysts evaluate
performance and plan for future goals.

Using spreadsheets for business forecasting

Business forecasting can be a long and tedious process of collecting information and making
calculations about your business and that of your competitors. Spreadsheets can aid business
forecasting because they allow different views of the data and editing is easy. They can also
help keep your data organised by saving all of your information on one sheet so that it's
readily available, making predictions easier.

There are many benefits to using spreadsheets as part of your forecasting process.
Spreadsheets can also help with:

 adding future variables that can affect the business in the next year
 calculating how many units of a product a company might sell in a quarter
 tracking the performance of departments

Business forecasting tools

Business forecasting software is the use of data mining techniques to provide forecasts for
businesses with real-time data and machine learning algorithms. Today, most forecasting
techniques use complex mathematical models like ARIMA modelling, a form of statistical
analysis used to forecast future business performance. But recent advances in computer
technology have enabled auto-ARIMA in business forecasting to save time.

Advances in artificial intelligence mean you can provide results in a relatively short amount
of time, as opposed to the months it normally takes to examine historical data. AI can also
analyse data in real time, so that the results of your forecast are not outdated. They analyse
social media trends and predict future popular products. These tools also issue reports on
their findings, which can include:

 Cash Flow statements: These determine the income of the business versus how much
money it spends.
 Industry Reports: If you collect data about your competitors, this information can help
you see where you stand in relation to them.
 Internal Assessments: These evaluate production and marketing.
 Production Charts: These tell you how much of a product is being manufactured as
compared to how many units customers buy.

How to conduct forecasting calculations, including examples

Sales forecasting involves using existing data to predict future sales performance. There are
many approaches businesses can take to make these predictions. Learning more about
forecasting approaches and their benefits can be valuable, especially if you intend to work in
business. In this article, we list how to perform forecasting calculations, explain their
importance and explore a few examples of forecasting scenarios.

How to conduct forecasting calculations

Forecasting calculations allow companies to make predictions about their future sales. They
can help businesses understand their current financial health and how healthy they may be in
the future. These projections can be valuable in informing strategic planning for how the
company may operate. Key stakeholders in a business may also want projections for future
profitability alongside current sales data.

There are different calculations organisations may use to project their future sales activity.
Typically, these calculations involve examining historical data to identify patterns indicating
future directions. Insight into consumer habits and trends can also be a key component. Here
are five simple steps a company may follow when calculating a forecast:

1. Track business data

Historical data regarding business activity is a valuable component when predicting future
activity. Tracking business data regarding sales and finances is an important part of
forecasting and may include total sales for a certain product within a specific period.
You may also wish to track data on returns to deduct these from sales figures to get an
accurate representation. Software packages can help you effectively track sales and client
data. Tracking and interpreting business data can help you understand the behaviours and
preferences of your customers and inform predictions about their future purchasing habits.

2. Define sales cycles and categories

Forecasts and sales data may be more valuable if they have specificity. Consider first the
period for sales you wish to examine. For instance, some businesses may define their sales
periods in terms of monthly, quarterly or annual sales. You may also want to analyse
historical data in terms of these sales cycles, looking at trends in sales from one quarter to the
next as you formulate predictions for the next quarter.

Be specific about what sales you're looking to forecast. Consider categorising and grouping
products rather than forecasting sales for all your product offerings or one product
specifically. For instance, bars and restaurants may categorise sales under drinks or food
sales. It's then possible to forecast how drinks sales perform versus food sales. You can
change how you organise sales based on what information you're forecasting.

3. Select a method for forecasting

There are various forecasting methods businesses can use. What's best for you may depend
on the business structure or objectives. For instance, the business may be new and without
historical data, but still wishes to forecast achieving growth objectives. In that case, using
forecasts and data from similar existing companies may be the best approach. Other types of
forecasting formulas include:

 Historical Forecasting:This approach uses sales figures from previous cycles and the
rate at which sales have increased. By applying increase rate trends to sales data from
the most recent cycle, you can predict sales numbers for the upcoming sales periods.
 Intuitive Forecasting:This approach uses the insight of sales professionals to make
educated guesses about sales trends, the completion date of deals and anticipated
profits. It doesn't rely on historical data, so this may be another possible approach for
new businesses.
 Bottom-up approach Forecasting:This looks to forecast sales based on the number of
customers a company can reach. The forecast is the estimated number of customers
you can reach multiplied by the average value of purchases per customer.
 Opportunity Stage Forecasting:This forecasting approach works from the probability
of completing a sale at each stage of a sales process or the company's overall
successful sales close rate. You use this method by multiplying the close rate with the
value of the opportunities in the current sales cycle.
 Multivariable Analysis:This approach looks at multiple factors, including insights
from sales professionals, historical data, and the probability of completing sales.
Mathematically analysing these different variables can be complex, so using sales or
forecasting software may be beneficial.

4. Apply a formula

You can apply simple formulas to make rough estimates of future sales. One of the most
straightforward approaches is using sales data from one year to calculate an annual sales
forecast. This approach assumes that sales are relatively stable. It involves looking at revenue
to calculate your average monthly sales rate and then using this rate to project through for the
remainder of the year.

To calculate the average monthly sales rate, divide the current sales revenue for the year by
the number of months passed. Multiplying this rate by the number of months remaining gives
the possible sales revenue for the rest of the year. Adding this potential revenue to the
confirmed annual income gives a rough prediction of your annual sales revenue. Another
simple way to get a yearly forecast is to multiply the total sales for the previous year by the
inflation rate and then add this value to the total sales value in the prior year.

5. Identify factors that may impact sales

A sales forecast can be a valuable tool to estimate future revenue, satisfy investors or inform
strategic business decisions. It's essential to be mindful of different factors potentially
impacting sales and altering your forecasts. Changes in economic conditions or supply chains
can affect predicted sales. For example, if consumer buying power decreases, they may be
less likely to complete sales. Seasonal market shifts, local political changes and internal
company changes can impact sales.

It's essential, therefore, to be willing and able to revisit your sales forecast. By being mindful
and aware of factors that may impact sales, you can amend and refine your forecast to ensure
it remains accurate and contemporary. It may be advisable also to round down when
calculating your forecast. It may be better to make a conservative underestimation of the sales
performance rather than an overestimate, especially if using the forecast as a strategic tool to
drive business decisions.

Related: How to create sales plans (with a step-by-step guide)

The importance of using forecasting

Calculating sales forecasts can benefit virtually all businesses, regardless of their size or
industry. It allows them to have a deeper insight into their actual health and capabilities. This
can help with strategic choices like budgeting, for example. By estimating future revenue,
businesses can ensure their expenses don't exceed this to maintain profitability.
Understanding the health of future sales, be it a potential increase or even a decrease, can
help guide decisions to sustain profitability. For example, a predicted downturn may indicate
the necessity of changing product features to keep them competitive.

Businesses can also improve profitability by minimising waste. By forecasting sales,

companies can make informed decisions about the amount of inventory they require for the
upcoming sales period, reducing waste potential. Accurate forecast data can also allow
businesses to set realistic goals, which can inform decisions on recruitment or marketing
budgets. Sales predictions may also form part of vital financial documents that stakeholders
or auditors require. Providing accurate, thorough forecasts may also be an excellent tool to
attract potential investors.

Related: 6 sales department functions (plus objectives and importance)

Forecasting calculation examples

Here are a few scenario examples of sales forecasts you may wish to refer to when making
your own forecast:

Example 1

Here's an example of an annual sales forecast based on available data for a new business:

A new business startup wishes to attract investors. To do this, the owner wants to show good
potential for return on any investment by showing a healthy sales forecast. The business has
been in operation for three months, with a sales revenue of £6,000. Here are the sales forecast
calculations:

 average monthly sales rate = £6,000 / 3 = £2,000

 possible revenue for the remainder of the year = £2,000 × 9 = £18,000
 sales revenue for the year so far = £6,000
 annual sales forecast = revenue so far + possible revenue for the rest of the year =
£6,000 + £18,000 = £24,000

Example 2

Here's an example of a forecast comparing annual sales performance for two different
products using inflation:

A small independent bar sells both food and drink. The owner wishes to compare the annual
forecast for food and drink sales. Last year, food sales generated £35,000 in revenue and
alcohol sales generated £65,000. The inflation rate is one per cent. Here are the forecast
calculations:

 food annual forecast = previous year's sales + (previous year's sales × inflation) =
£35,000 + (£35,000 x 0.01) = £35,350
 drink annual forecast = previous year's sales + (previous year's sales × inflation) =
£65,000 + (£65,000 x 0.01) = £65,650

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