How to forecast customer demand

Running a business can be challenging because you might never predict everything fully or be entirely sure of how things turn out. Accurate forecasting of customer demand can be tricky, but it could be a valuable source of information and help you make better business decisions.

Learn how to forecast customer demand and optimise your stock management in this article, including:

• The importance of forecasting customer demand 
• How small businesses owners can forecast demand
• Forecasting demand and stock management

Forecasting refers to the process of making predictions about future demand using historical and other types of data. Intelligent demand forecasting can positively impact any business’s operations, reputation, and sales. 

Predictions of future customer demand can help you set realistic sales goals and adjust your business goals accordingly.

Businesses risk making poor decisions about their products and target markets if they do not forecast demand. The most important aspect of demand forecasting is that it optimises inventory, budgets for growth and reduces holding costs.  

Forecasting customer demand is an essential aspect of financial planning. A proper financial plan makes it so much easier to stay on track with your business.  To learn more about financial

planning, read our article Why You Need Financial Planning in Your Business.

1. Define the purpose of forecasting demand
2. Collect and record data
3. Analyse data
4. Budget accordingly

Start your forecast with a clear goal in mind. For example, do you want to optimise inventory management? What is the specific time frame of your projections? Are you trying to figure out the demand for a particular product or a group of customers? 

Being clear about your objectives will help you decide what kind of relevant information and the type of data you need to gather in the next step of your forecasting process. 

If your company is not new and you have historical data of your past sales, you can use this information to make general estimations on future sales. Other factors to consider could include your competition, the current situation of your industry, seasonality, global events and so on, as those can impact the demand for your product.

If your business is new and there’s no previous sales data available yet, you could closely research your target market and marketing strategy. For example, suppose you have estimates of how many people your marketing strategy could reach and how many of these people are likely to turn into your customers. In that case, you can use these projections instead of historical data.

How to analyse the data you have will depend on the type of your business and the objectives you set in the first step of the forecasting process. 

Look at all the available data and see if you notice any apparent patterns, such as an upward trend in your sales just before Christmas. Or perhaps there’s a surge in inquiries after every social media campaign you do? Assessing these patterns can help you make more accurate predictions of future sales. 

It’s important to remember that there are never any guarantees in business, and your forecasts might not always be accurate. But an excellent strategy to minimise risks can be to create three different forecasts; a best-case scenario, average forecast and worst-case scenario.

Your best-case scenario could be where you make an optimistic assessment on how many new clients you’ll get after investing in some paid Google ads, for example. Or perhaps you looked at how many visitors from your website ended up becoming paid customers and predicted this number to be higher by 5% every quarter. 

Your neutral forecast will predict that your business will continue to attract a similar number of customers as it currently does. The worst-case scenario would be if the demand for your services for some reason significantly drops. 

Preparing for these different scenarios will help you quickly make well-informed budget decisions according to your business’s performance.

Taking advantage of demand forecasting allows you to make sure that your products are never out of stock. Inconsistent product availability could drive your customers to competitors. You can also avoid stocking too many products, which could increase storage costs.

Demand forecasting techniques can help you effectively manage and control your inventory. Ensuring you have the right amount of stock at all times can help speed up inventory turnover and decrease carrying costs. 

Being aware of your product demand can also help you improve your supply chain efficiency. For example, production, warehousing, and shipping can be better scheduled using sales forecasting. 

Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.

With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.