Forecasting Using the Just-in-Time Method and Rolling Forecast Technique
If a business aims to increase customer patronage, due consideration should be taken to prevent over or under projections of inventory level. These are two scenarios which should be avoided, since they are often the pitfalls of most entrepreneurs once their nouveau businesses start picking up:
- Overstocking of goods-- as this will tie up the cash funds for a longer period over the short-term of the trade credit.
- Understocking of goods – because the inability to meet demands not only creates a negative impression on the part of the customer but also equates to opportunity lost. Profit which could have been realized is foregone and perhaps gone to the competitor.
Just-in-time method or "kanban" means keeping the inventory level as needed. Although this is often used in manufacturing, the same principle can be applied in retailing by keeping one’s forecast up to date. The technique is known as "rolling forecast" as actual costs are rolled over as the next month's forecast. (Kindly click on the image to view the monitored levels of the stock inventory)
Supposing that as of January, the beginning inventory was valued at $1,000 and business started picking up as a result of the promotional discount. The total goods available for the month would be $3,000, comprising the purchase of the $2,000 projection plus the beginning inventory of $1,000.
The total cost of goods sold for the month is worth $2,500 which results in an ending inventory level of $500 worth of goods.
In order to meet the rising demand, the amount of the purchase ordered for February will be based on the actual cost of goods sold of $2,500, as incurred in January, instead of sticking to the original forecast of $2,000. Thus, the total goods available for February will be $3,000 (February purchase of $2,500 plus current inventory balance of $500).
The cash flow statement for the month of February should likewise be adjusted to provide management with an up-to-date figure regarding the amount of cash that the business will be working on for the current month.
Supposing further that the actual cost of goods sold for February is worth $3,000; this means that at the end of the month, the stockroom is depleted. This depicts the understocking scenario, where the entity fails to supply the demand and there will be opportunity lost. Monitoring and timeliness of orders and deliveries should be given utmost attention to avoid such occurrences.
The projected purchase for the month of March should therefore be adjusted to $4,000 instead of the $3,000 originally projected for the month of March. The amount is based on the depleted inventory beginning of $1,000 plus the actual cost of goods sold in February. In using this method, however, management should ensure that:
- The supplier’s services and ability to deliver on demand is bankable.
- The inventory records are reliable.
- The sales records and cash balance show the same proportion of trend in terms of increases.
- The cash flow is up to date with its projections.
April to June:
Adjustments in forecasts should also take into consideration the seasonal demand. Let us presume that by April to June, the sales continue to be robust. Hence, the purchases for these months should also be based on the actual cost of good sold of the previous month plus adjustments in inventory level, if necessary.
Thereafter, due caution should be applied when making forecasts for the succeeding months that are considered “lean". This is the time of year when most consumers will be saving up for the coming holidays in addition to weather conditions that could bring about negative effects.