Measuring Forecast Accuracy: A Guide

If forecasting makes you feel stressed or uneasy – we get it. It’s a lot! But it’s also one of the things that can make or break your business, which is why you want to make sure it’s accurate.

When your forecast is on point, everything hums along nicely. If you’re off by a little, it can mess with everything from staffing and inventory to your overarching retail strategy. So, how do you measure forecast accuracy? And more importantly, how can you improve it?

In this guide, we’ll cover common mistakes to avoid and actionable tips to improve your forecasting accuracy.

How to improve sales forecast accuracy

Let’s be real – you’ll never be completely accurate with your forecasting (unless you have superhuman powers, of course). But, there are several best practices you can follow to have more accurate demand and sales forecasting. 

1. Clean up your data

Accurate forecasts start with accurate data. Clean up your sales records and ensure your entire team is working with the same numbers. 

For example, if you change systems or naming conventions (like SKU names), ensure that your data is aligned before making any forecasts. You don’t want to forecast for two different SKUs when they are actually the same product. 

2. Lock your forecast and stick to the plan 

Your plan stays locked for a longer stretch – ideally a year – but to truly measure forecast accuracy, your forecasts need to be locked too. That way, you’ve got a solid point of comparison and can actually track how close you’re getting to the mark. While your forecast will evolve as new sales and market data come in, it’s important to review and adjust your forecast at regular intervals.

3. Pick the right forecasting method

Different forecast models work better for different businesses. Choose a model based on your data and business goals. For instance, if you want to understand how to forecast the volumes in your industry, you may need specific methods depending on your market conditions and the available historical data. 

We recommend utilizing both top-down and bottom-up forecasting methods. The top-down approach helps align your business with market trends by looking at overall peaks and valleys and forecast accuracy benchmarks by industry. In contrast, the bottom-up approach helps you pinpoint which specific categories are poised for growth and which may not perform as well. Combining both methods ensures a more balanced and accurate forecast.

4. Leverage technology and forecasting tools

So, what is the best tool for forecasting? A forecasting dashboard of other tech forecast solutions can be incredibly useful, especially if it provides real-time visibility into your data. These tools can help you track trends and improve your accuracy over time. 

That said, most teams still rely on a good, old-fashioned spreadsheet. They’re flexible, familiar and often easier to adapt to specific needs. In most cases, the best approach is a combination of both: using forecasting tools for speed and visibility and spreadsheets for customization and control. 

5. Consider external factors 

Historical sales data is an excellent starting point when building a forecast, but it only tells a portion of the story. If you want your forecast to capture the full picture, you need to consider market trends, consumer buying habits, yearly holiday shifts and the occasional curveball from the economy. Improving forecast accuracy, especially in the retail industry, means incorporating these external factors into your predictions. 

6. Review and adjust your forecasts regularly

A forecast isn’t a one-time task; it’s an ongoing, dynamic process. Your sales forecasts should evolve the same way market conditions do, so don’t set your forecast and forget about it. Regularly revising your forecasts based on sales performance and market changes is key to improving accuracy and reducing forecast bias.

Pro tip: Review your forecasts on a monthly basis. Ideally, each new monthly review becomes the new forecast, ensuring your projections are aligned with the latest market conditions. 

7. Track your progress with KPIs

Forecast accuracy KPIs are a way to see how your forecasts are stacking up to your actual sales. This can include demand forecast accuracy or inventory forecast accuracy metrics. If you’ve got a solid plan in place, we’d recommend tracking the “+/-” as a KPI too. Since your forecast will shift month to month but your plan stays steady, seeing the +/- to both helps paint a clearer picture of your forecast accuracy and overall business performance.

One of the most common ways to measure forecasting accuracy is through MAPE, which stands for Mean Absolute Percentage Error (MAPE). This metric calculates the difference between predicted and actual sales, showing you how far off you were in percentage terms. In conjunction with MAPE, it’s equally important to review your week-over-week and year-over-year sales and use all three as a guideline.

8. Make historical sales data your foundation

When planning for future demand, historical data will be your best friend. Relying on historical data will help you understand the patterns in your sales and inventory over time. Look back to see when your products flew off the shelves (and when they didn’t) so you can plan smarter, not harder.

Improving your sales forecast accuracy isn’t about achieving perfect predictions but rather getting closer to accurate estimates that help you plan better and smarter. Using the right forecast accuracy measures and leaning on your historical sales data can help you achieve more reliable forecasts. 

Forecasting accuracy is often a trial-and-error process. By learning from each cycle, you’ll refine your methods and better align your sales strategy with business outcomes. The more you track your progress, analyze results, and adjust your methods, the more accurate your forecasts will become.

By following forecast accuracy best practices and incorporating the right forecast accuracy methods into your process, you’ll start to see more consistent forecasts that fuel business growth. 

Psst… if you're finding it challenging to maintain accurate forecasts – you’re not alone. We’re here to help! We can help ensure your forecasts are precise, reliable, and on track to hit your sales goals.