Forecasting is a process that helps the people of an organization understand how their actions affect progress to achieve goals and which objectives a company is driving towards. Forecasting is a management tool that allows a team to see into the future and prepare in advance of an event or season by communicating what the various departments within an organization will do to help each other. Through inter-organizational communication, opportunities for improvement are recognized as obstacles are defined when a team thinks through the process of what needs to be done.
Forecasting usually starts with an income statement that includes sales, cost of goods sold, gross profit, operating expenses, net income, and debt service. If an operation contains multiple product sales like in the seafood business then it is wise to forecast margins by species because the sale of each species is likely to have different margins. Margin is the difference between sales price and cost of goods sold. Margins produce gross profit that is then used to cover operating expenses. It is a best practice to forecast sales for each species by month, quarter, and year. Management is then in better position to understand historical performance by species and factors effecting prices so management may plan for the upcoming season(s).
Sometimes, those involved in the forecasting process react with hesitation to participate because the process is new and they are unsure of how to proceed. Often this materializes as a list of reasons why forecasting is difficult to make work. This reaction is natural. Forecasting is a way to give everyone on the team a voice. Each team member has the opportunity to listen and learn how the actions of people, the cash flow conversion cycle of product sales, and use of profit to sustain the living organization blend to make the operating company work. Companies that forecast invariably come in close to what they forecast and better position themselves for growth, defend against competitors, or catch a break in the market.