Understanding The Critical Elements of Forecasting Sales

One of my biggest pet peeves in the Motorsport and Marine industry is the method in which you are required to book your unit purchases for the next season. The system does not make sense when you consider you have to place your order 6 to 8 months in advance of the season with very little or no information to base your decision. There are a number of things you can do to minimize the risk of placing the right booking order and maximizing your potential sales. Learn how.

It's that time of year when your District Sales Manager walks in the door with a booking order form listing the models available for purchase for the next season. It has to be done before the end of the month so the manufacturer can put the orders into production. One thing you can't change is the lead time the OEM requires to manufacture the product. So how can you reduce your risk of ordering too much or too little product for the next season?

I am not insinuating that you don't take your booking orders seriously and do as much planning as possible, but allow me to outline some of the things I think are essential to the process.

Once you have completed your financial performance analysis on your financial statements you will have a clear understanding of your ratios, sales volume for each department, gross margins and key expense percentages. Comparing this to industry standards tells you where you can make changes and how aggressive you can be with your next year's goals.

The next step is to record on a spreadsheet the number of unit sales you sold by month for each product group, preferably for the last two years. Now you have a clear understanding of your total volume sales in unit numbers for the last year or two.

Next you want to acquire from your DSM, the number of units sold in your market place by manufacturer for the last two years. I would request this at least one month before you are expected to book your units for the next season. This allows you to assess your market share versus the total number of units sold. Your DSM can probably tell you what the national market share is for your product group, which allows you to assess your status within your market area.

You should then take some time to assess what you think is going to happen economically within your region and globally to set your expectations for growth in the coming year.

Armed with this information you can now forecast the number of units you think you will sell by month for the next season. Take caution that you consider sales by delivery date, not invoice date. This is the starting point for building your business plan for the next year and drives all other components such as parts, accessories, service and expenses.

Once you have established your anticipated sales for the next season, take into consideration your carryover units you have in stock, your target ending inventory and subtract that from your forecasted sales and you now have a qualified number for your booking order.

On the surface this may seem like a lot of work but you have most of this information at your finger tips. It is simply a matter of organizing it so you can make an educated decision on your unit requirements for the next season.

In review, here are the steps you should take before signing a booking order:

  1. Update your financial performance analysis for the last fiscal year.
  2. Record on a spreadsheet your actual unit sales by product group by month for the last two years.
  3. Review the number of units sold by all manufacturers in your immediate marketplace plus your manufacturer's market share for that particular product group.
  4. Consider what regional and world economic pressures may bring to bear for the next year.
  5. Record on a spreadsheet your anticipated sales by product group by month for the next fiscal year.
  6. Calculate in your expected unit carryover plus your target ending inventory to establish your booking order requirements.

The spin off benefit from this exercise is that it lays the ground work for preparing your next year's business plan. It also allows you to communicate to your finance company what your wholesale credit line requirements will be and if there is a need for an increase.

Finally, your DSM will appreciate the effort you have taken because it will eliminate a lot of the push/pull negotiation you normally go through in preparing a booking order. Your DSM may not agree with your unit purchase requirements, but you have a sound foundation for negotiation based on your well prepared forecast.

This is one of the most critical parts of your business planning each year, so take charge of the process. If you want help in preparing this information, contact me for a free consultation.

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