What Are Some of the Techniques Used to Forecast Sales & Related Costs of Goods Sold?

• The cost of goods sold is forecasted by analyzing inventory and reviewing other economic factors. Jupiterimages/Photos.com/Getty Images

  Companies stay competitive and profitable by preempting future sales and the impact of changing prices regarding their product line. Though forecasters have no crystal ball as means of predicting these changes, most arm themselves with firm knowledge of economics and finance by means of accomplishing this task.

Previous Sales

• Companies use data of past performance as means of predicting future performance. David Kurz and Kim Snow, authors of "Contemporary Marketing," explain that using prior sales is a form of quantitative forecasting called "trend analysis." Sometimes, the prior month's sales data generates the most insight, whereas seasonal industries, such as ski resorts, must use data from the year prior. Forecasters temper these numbers with current economic conditions. For instance, most companies recognized that the Christmas sales from 2007 would not be an accurate estimate of sales in 2008, given the year's economic downturn. The data provides a range by which the company can predict the best- and worst-case scenario for the sales it expects to generate.

Inventory Turnover

• Companies use inventory turnover ratio to gauge if the cost of goods sold (also known as COGS) will rise or fall. The inventory turnover ratio is determined by analyzing how much inventory the company buys with respect to how much it sells. David Simchi-Levi and Philip Kamins, authors of "Designing and Managing the Supply Chain," explain that managing inventory effectively enhances a forecaster's ability to use judgment-based forecasting methods. Naturally, left-over inventory yields significantly less revenue than the inventory sold to customers at retail value. Furthermore, how much inventory remains sometimes dictates the value of the cost of goods sold. For instance, companies typically receive bulk discounts for items that go into the production of an assembled good. If, however, the business does not sell enough of the items, the company's cost of goods sold may rise if it is unable to achieve these economies of scale.

Inflation

• Inflation affects sales and the cost of assembling the goods. Inflation is defined as a rise in prices. Thus, if a company sells cars and the price of steel increases 2 percent, the company will either pass along the price change to its consumers or absorb it and experience lower profits due to the higher cost of producing one unit. Forecasters predict inflation by analyzing the change in the price of various goods over a period of time. Multinational corporations are particularly sensitive to inflation, as a rise in prices in their home currency will make their goods more expensive to sell overseas.

Consumer Confidence

• A willingness to spend money is most evident during the holidays when most people exchange gifts. However, economic conditions cause people to spend either more or less money than prior holidays. For instance, a general climate of economic uncertainty causes many to rethink large, expensive purchases. High unemployment is another reason people might spend less. Forecasters analyze the degree of consumer confidence and sometimes adjust their expected sales based on the figures. Low consumer confidence indicates a resistance to spend money and usually results in fewer sales.