September 02, 2014

Forecasting Assumptions

Regardless of the forecasting system employed by companies, there is one common thread ... over-forecasting.

Let's say that in 2014, your business will generate $19.6 million in demand, and will generate $1.0 million in pre-tax profit ... an approximate 5% pre-tax profit rate. Not good, not bad, just tepid, average.

Somebody in Management is not going to be happy with another year of tepid results. This person will challenge the forecast to "push buttons", in an effort to move the business forward.


Do not ever submit a forecast based on sales assumptions that are not backed by strategies or tactics.

Look at the example above. The rebuy rate in 2015 is forecast to be 40% ... it was 38.5% last year. Unless there are strategies and/or tactics to move this metric, why forecast it to increase?

Look at the reactivated and new buyer counts. Both are forecast to grow faster than in the past. Why? What are the strategies/tactics that yield the increases? Are there any? And are the strategies/tactics profitable? If not, who is going to sign off on the losses?

Look at the spending figures. There is historical precedent to forecast an increase in spend, but again, there have to be strategies/tactics that back-up the forecast.

Just six assumptions cause the business to grow from $19.6 million to $22.6 million, double the rate of growth from the prior year. Without tactics to defend sales growth, you're going to buy too much inventory, and you're going to have a veritable plethora of promotions to clear merchandise, killing profitability.