Inventory forecasting is a crucial part of running a business. Its aim is to make sure you have enough stock to meet demand from your customers. But getting it right requires a tricky balance. If you overestimate what you need, and you could be stuck with large invoices and not enough cash in the bank to pay them. On the other hand, if you underestimate how much stock you need could leave you with empty shelves and missing out on valuable sales.

Here’s a guide to help you with inventory forecasting.

There are four common methods for inventory forecasting. These are:

Your forecast period is the length of time you are forecasting your inventory needs for. You might be forecasting for the coming 12 months, three months or four weeks, depending on your order lead times and other upcoming events.²

It could be important to note if any major seasonal or one-off events fall within your forecast period, as these may influence sales and affect your inventory requirements. For example, a forecast for the three months from October to December, which covers peak retail season, is likely to be very different to a forecast for January to March.¹

In order to create your forecasts, a good place to start is collating all the relevant data that could inform future sales.

Types of data you could collect:²

• Historical sales data
  
  
• Expected demand and seasonality
  
  
• Sales trends and velocity
  
  
• Customer response to specific products
  
  
• Market research
   

You may also need to consider factors such as the nature of your and your customers’ average frequency of purchase from your store. For example, if you’re forecasting a household item that customers buy again and again, that will impact how much inventory you need.⁵

Sales velocity is the rate of a business’s sales of a particular product discounting any time that the product was out of stock. It is considered a more useful data point for inventory forecasts than average sales, as average sales could lead to underestimating future sales and experiencing more stock outs.

For example, say your business sold 15 garden chairs in 15 days, and the chairs were out of stock for the following 15 days. The average sales rate for that 30-day period is 0.5 chairs per day, however this doesn’t necessarily capture the full demand. By looking at the sales velocity – in this case, one chair per day – you get a better sense of how much demand there is for your product.³

When it comes to forecasting, aim to get insights from across the business. For example, your sales staff might have some insight into customer sentiment, and the people responsible for customer services may have information about products that are proving popular. These insights could help guide your forecasts.

In particular, it could be an idea to stay in regular communication with whoever is responsible for marketing. Any marketing activity promoting certain products is likely to increase demand for those products, so it’s important to take those plans into account when creating forecasts.¹

There are myriad factors that you could use to help guide your inventory forecasts. How much resource you can dedicate to gathering data points and creating statistical models to build a picture of your future inventory requirements will depend on the size of your business.

However, bear in mind that you can always tweak your forecasts if some of your assumptions have turned out to be inaccurate.² This simple tool can help you efficiently manage your inventory.