The simple version of demand forecasting looks at what you sold last month or last year to determine what you will likely sell the following month or year. If you want to introduce a new product, demand forecasting helps you determine when to release the product and how likely the product’s success will be.
At its most basic level, demand forecasting combines market movement, historical trends, externalities, and internal factors to predict sales. These predictions let you plan production, marketing campaigns, delivery to retail stores, etc. The demand forecast further contributes to other business predictions and planning reports including those for capacity planning, profit margins and cash flow, future turnover, capital expenses and expenditures, risk assessments, and business continuity plans.
Types of demand forecasts
Four main types of demand forecasting exist. Which type you choose depends on your business goals. You might combine them as well.
1. Active and passive forecasting
Typically, you use one or the other – active or passive. An active forecast provides businesses in the growth phase with the information that allows them to scale. Startups that already obtained significant funding and can quickly scale use this method.
A passive forecast works well for stable businesses in limited or moderate growth. It uses historical trends and minimal demand assumptions to devise a forecast. The businesses are less likely to scale the use of this method.
2. Term forecasting
This kind of forecast provides projections in the short-, medium-, and long-term. It bases short-term projections on prior sales data while its long-term projections focus on the growth aspirations. The medium-term connects the two. The mid- and long-term forecasts encompass new products, capital expenses, business strategy, and other growth-related mechanisms. These also may include industry growth or expansion in their formulas.
3. Macro and micro forecasts
Macro forecasts look at the market as a whole while micro forecasts consider a single external impact on the industry or the business. Both consider external factors, but the micro casts provide a much more granular view.
4. Internal forecasting
An internal forecast examines the effect its internal operations have on its production, finance, sales, etc. It includes human resources forecasts in its process to determine the necessary staff for scaling.
Combining these forecasts can provide an accurate picture of which to build for expansion. While a company’s goals may only require one type of forecast, as needs change, the business may introduce other forecast methods, too. If you want to obtain a business loan, venture capital, or an angel investor, you will need these forecasts to present as a part of your business plan.
Photograph by Lalmch