Inventory Forecasting for Small Businesses

Gauri Sachan |Updated on: April 18, 2024

An important part of inventory management that small businesses should focus on is inventory forecasting. Forecasting your inventory properly can help you increase your profitability, prevent stock-out issues, manage surplus goods and reduce costs in the long run. What is inventory forecasting all about, and how does it help small businesses? Let’s find out from the below sections.

Inventory forecasting

The process of predicting future demands of stocks based on historical demand patterns and present trends is called inventory forecasting. Using this, you can accurately predict how much stock you would need of a particular product in the future and plan your purchases accordingly. This way, you can get rid of under-stocking or over-stocking issues. Your customers can get your products right on time always, thereby reducing all possibilities of customer grievances.

When you have an almost accurate idea of the quantity of stock you need for different products, you can plan your sales better, and focus on improving your profitability. As a small business owner, the last thing you would want is for your customer to cancel his order due to the non-availability of goods, or face issues in the supply chain cycle. Inventory forecasting helps you get rid of all these bottlenecks and plan your inventory in a more organized way than before.

What factors affect inventory forecasting?

What are the factors and data that inventory forecasting requires to arrive at an almost accurate estimate of your future stock requirements? While many fit the bill, here are the most important factors that deserve special mention:

• Present inventory levels of the small businesses
• Current Purchase Orders pending payment from customers
• Past trends indicating the demands and preferences of customers for certain products
• Past trends and speed of sales volumes
• Feedback from customers to certain products
• Maximum stock levels that a small business can accommodate

Based on these factors, inventory forecasting uses data analysis, draws inferences and estimates the future requirement of stock.

Inventory forecasting and demand planning – Are they the same?

Today, in many business circles (whether big small or big), the terms, inventory forecasting and demand planning are used interchangeably. Though both are essential tools of a wider department (inventory management), they are not the same. Both concepts have to be implemented together by small businesses to get the desired results such as increased profitability, reduced loss of sales instances, better planning of inventory costs and more.

Demand planning involves more about forecasting the future orders of small businesses, whereas inventory forecasting involves forecasting the stock required to cater to these orders successfully every single time.

4 common types of inventory forecasting methods to help small businesses

As a small business owner, you can use some of these popular inventory forecasting methods to get accurate estimates of your future requirements and plan your inventory better than before.

Trend forecasting

Using this trend, you can estimate the future sales trends of certain products, and then plan your stock accordingly. This way, you can purchase more of those products that sell like hotcakes. You can also get more information on products that don’t sell as fast as others. This method of inventory forecasting uses upward and downward trends of past sales figures of products and gives you detailed reports on what you can expect with upcoming demand.

Graphical forecasting

This method of inventory forecasting is only an extended, attractive and visual representation of the data presented in the above methods. These graphical illustrations allow small businesses to study past sales trends in great detail, and infer patterns from them.

Qualitative forecasting

If you have just started your small business, you may not have any historical data to base your inventory forecasts upon. In this case, you can make use of the qualitative inventory forecasting method. Here, forecasts are made based on current market trends, economic factors, personal preferences of customers, customer reviews and market research. You can plan your future inventory based on these researches and reviews, as these are the most relevant methods available for new businesses or businesses looking to launch new products in the market.

Quantitative forecasting

This type of inventory forecasting is one of the most accurate of all methods because it relies on numbers alone. No trends, patterns or personal preferences are checked here. Your sales figures for the past year or past quarter (whichever period is available) are analyzed in detail to predict the future demand for inventory. Since it depends on past sales figures, quantitative forecasting is quite close to perfection, while forecasting the demand for certain products.

Bottom Line

Inventory forecasting plays a big role in improving the profitability of small businesses and reducing their overall costs. It would be a good idea for businesses to use the right inventory management software, and make the most of technology, to have better control over their inventory. When your inventory is managed well, you don’t have to worry about customer dissatisfaction issues, and this augurs well for the overall health of your business