Do you ever feel like you’re just throwing darts in the dark when it comes to forecasting sales? You’re not alone. Forecasting is a tricky business, and many small businesses struggle with it. The good news is that there’s a method called Top-Down Forecasting that can help make things a bit easier. In this blog post, we’ll discuss what Top-Down Forecasting is and how you can use it to assess the market and predict sales for your business.
What Is Forecasting?
Forecasting is the process of looking at past and present data, as well as marketplace trends, to predict the company’s future financial performance. It enables you to gauge how much revenue you’ll potentially earn in a particular period and plan for big expenses.
What Is Top-Down Forecasting?
Top-Down Forecasting is a method of forecasting that starts with an assessment of the market as a whole. First, you determine the current market size available for your business and factor in relevant sales trends. Then, you estimate how much of the market will buy your products or services. In the context of these trends, you examine your company’s strengths and weaknesses and, ideally, how to amplify your strengths and remedy your weaknesses.
Why Is Top-Down Forecasting Important?
Top-down forecasting is important because it enables you to see the big picture. When you understand the overall market trends, you can make more informed decisions about your own business. For example, if you know that the market for your product is growing, you can invest in marketing and expansion plans accordingly. Top-down forecasting can also help you to identify potential weaknesses in your business model and take steps to address them.
The Top-Down Forecasting Process
Step 1: Total Addressable Market
You begin the analysis by outlining the Total Addressable Market for your company’s products or services. To do this, you’ll need to gather data on the current market size and relevant sales trends.
Step 2: Calculate Market Share
Once you have a handle on the overall market, you can estimate how much of it your company will capture. To do this, you’ll need to consider your company’s strengths and weaknesses in relation to the competition.
Step 3: Forecast Revenue
With your market share estimates in place, you can calculate your company’s potential revenue by multiplying the Total Addressable Market by your percentage of market share. Remember to factor in other important assumptions, such as the volume of orders and the average prices of products or services being sold.
Step 4: Run and Adjust the Forecast
Once your model is set up, you simply need to run it and adjust the inputs as needed. You will want to do this on a regular basis, especially if your business is growing or changing. Forecasting is not a one-time event; it should be done regularly to ensure that your numbers are accurate.
Step 5: Review and Summarize
You should look at your forecast results to ensure they make sense and summarize them in a way that works for your business. For example, if you are forecasting customers on a monthly basis, you may want to do quarterly and annual views. If you are forecasting by store, you may want to view by region. You may even want to look at trend views to ensure there aren’t any outliers.
Top-Down Versus Bottom-Up Forecasting
In simple terms, top-down models start with the entire market and work down, while bottom-up forecasts begin with the individual business and expand out. Understanding the pros and cons of both types of financial forecasting is the best way to determine which methodology is ideal for your specific needs.
A top-down forecast is a good place to start when you don’t have a lot of data or history to work with. It can be helpful in identifying potential weaknesses in your business model and taking steps to address them. A bottom-up forecast may be more appropriate when you have a lot of data points to work with.
Pros of Top-Down Forecasting
One of the benefits of top-down financial forecasting is that it avoids statistical outliers, common when you dive into the details. Because of this, a top-down approach offers companies a broader picture of revenue potential and can help them identify sales patterns. This could allow companies to create more accurate models for strategizing and allocating resources. Because this view tends to provide a more optimistic outlook, businesses may have an easier time using a top-down forecast to communicate with investors.
With top-down forecasting, companies don’t need up-to-the-minute data to forecast results. Businesses that assess available market revenue from the top down—especially new ones—may find it easier to generate projections. As an added benefit, a top-down view evaluates whether a market is increasing or decreasing, so startups can easily gain insight into long-term profit potential.
Tips and Tricks
Finding Data And Assumptions
Forecasts are only as good as the data and assumptions you put into them. So where can you find solid data? If you have an existing business, the first place to look is your financial system. Historical data is one of the best inputs to a forecast. You can also work with your operations teams to understand what it will take to deliver a certain level of performance.
For a new business without historical info, you will have to dig a bit deeper. Economic data and market research are your best bets. This can include digging into resources like the Consumer Product Index (CPI) for inflation or studying your competitors.
Step Back And Do A Gut Check
As you get into the weeds of your forecast, it is important to step back and ask yourself, “Does this make sense?” Think about how the forecast looks year-over-year and sequentially. Do you have the capacity and workforce to even deliver the forecast? Do the trends seem reasonable or are there unusual outliers in the forecast?
It is critical to sanity-check your work and ensures you put out a great product
Build For the Future
When working on a forecast, do yourself a huge favor and build it for the future. Well, obviously a forecast is for the future, but I mean the model itself. If you are running a forecast today, you are likely to run the forecast again. Make sure the model is dynamic enough to pull in new actuals and roll forward for future time periods. Avoid hardcoding, and try to link everything up to data tables. Make it clear which periods and cells are actuals and which are forecast.
This may take some extra time to set up, but it will really pay off down the road.
Top-down forecasting is a great way to get an overview of the market and predict sales. It starts with the business assessing the market as a whole and determining the current market size. From there, businesses can estimate how much of the market will buy their products or services. Top-down forecasting can help identify weaknesses in your business model and take steps to address them. It can also provide a more optimistic outlook for businesses and help them communicate with investors. However, it is important to remember that forecasts are only as good as the data and assumptions you put into them.
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