Improve Operational Performance by Improving Your Forecasting

November 02, 2018

“If you don’t know where you’re going, you’ll never know if you get there.”
This time-tested adage holds especially true when it comes to forecasting. Dealerships must make accurate forecasts of their sales, expenses, and gross and net profits to make wise decisions about allocating their resources.

Forecasting ― or guessing?

Some dealership owners will say that they already perform forecasting. However, their forecasts are little more than educated guesses. For example, they’ll ask their new and used car managers how many vehicles they expect to sell in the upcoming month. And the managers will provide their best guesstimates.

But there’s a big difference between real forecasting and educated guessing. A true forecast considers two main factors:

1. Seasonal trends. These are derived by looking at historical sales numbers to see how seasonality affects sales. For example, all other things being equal, the sales figures from last January should give a good indication of what sales this January will look like.

2. Current trends. These are derived by using recent monthly sales figures to get an idea of current activity. Based on these numbers, you can create a simple moving average of sales over the past few weeks or months. For example, say the past three months’ new vehicle sales were 80, 120 and 100 vehicles. So, the simple moving average for this period would be 100 vehicles (300 total vehicles sold divided by 3 months). Examining current trends gives you a good look at the current environment compared to prior years.

To forecast new vehicle sales for this January, start by looking at last January’s sales to get an idea of seasonal trends. Let’s say that 80 vehicles were sold last January. In that case, you’d factor in the simple moving average of 100 vehicles sold per month. Based on this data, you might forecast slightly less than the simple moving average due to historically slow January sales, or perhaps 90 vehicles.

On the other side of the ledger is expense forecasting. This is usually straightforward: Add up all your dealership’s general administrative costs and overhead — things like employee salaries, rent, utilities and data processing. Then tally variable expenses such as advertising, sales compensation and policy adjustments and add these to your administrative costs and overhead. These vary depending on sales volume, so you should base forecasts on a per-unit basis or a percentage of projected sales. Finally, subtract this number from your gross profit to arrive at your projected net profit for the month.

Frequency of forecasting

Forecasting can be done on an annual, quarterly or monthly basis. Many dealerships are moving away from static annual forecasting because so many things can change over the course of a year that render the original forecast obsolete. Instead, they’re adopting dynamic monthly and quarterly rolling forecasts. These kinds of forecasts tend to more accurately reflect what’s happening in the marketplace now.

Some dealerships find it helpful to meet with their managers off-site to create the next month’s or quarter’s forecast. This eliminates office distractions and allows managers to focus on the task at hand.
It also encourages input from each other about their numbers and how they arrived at them.

Spending a half-day in a hotel conference room working on forecasts with your managers can pay off handsomely by providing you with more accurate and actionable numbers. It also helps get buy-in from your managers — those responsible for making the forecasts happen.

Improve operational performance

If your forecasting process consists of more “guesstimating” than real forecasting, now is a good time to launch some of these ideas. Improving the accuracy of your forecasts can result in better operational performance for your dealership.

© 2018