Business Finance

Demand Planning: What It Is and How to Do It for Your Business

Oct 28, 2022 • 6 min read
cash flow forecasting
Table of Contents

      Running a small business can be a rewarding experience. It’s hard to beat the rewarding feeling you get from seeing your business dreams turn into reality. Yet at the same time, you can face some unique challenges as an entrepreneur—challenges which may require research, special tools, and even professional advice to navigate. 

      One challenge you may encounter is the need to design a roadmap for the future of your business, and not just in one area. You may need to come up with plans for your company’s future financial performance, sales and inventory needs, and even the projected demand for the goods and services your business provides to its customers. 

      The latter of these projections is known as demand planning. Demand planning is an essential step if you want to avoid supply chain disruptions and other potential (and potentially expensive) issues in your business. 

      This guide will help you understand more about what demand planning is and how it works. You’ll also discover helpful tips on how to implement a demand planning strategy for your own business when you’re ready to get started.

      What Is Demand Planning? 

      Demand planning is a type of financial forecasting that businesses can use to predict the future demand for the products and services they sell. It’s a way of looking ahead and figuring out how much your customers and future may order from your company in the weeks, months, and years to come.

      Everyone has seen the results of demand planning gone wrong. Empty toy shelves at Christmas, sold-out game systems, and impatient consumers clamoring to purchase popular athletic shoes are just a few of the images that come to mind as examples of such events.

      An effective demand planning system aims to help businesses stay ahead of the competition and avoid similar issues. Problems like supply chain shortages, depleted inventory, insufficient staff numbers, and an inability to fulfill customer orders can all be more manageable (and even perhaps avoidable altogether) with a proper demand planning strategy. 

      The goal of demand planning (sometimes called demand forecasting or enterprise resource planning) is to help a business remain as profitable and competitive as possible. Effective demand planning should enable a business to plan ahead and have the right amount of resources on hand to satisfy customer orders. At the same time, proper demand planning helps a business avoid complications like having too many financial resources tied up with overages of inventory, storage, and staff.

      How Demand Planning Works

      Demand forecasting is one piece of a much bigger overall puzzle when it comes to financial planning for your business. So, if you don’t already have a solid financial forecasting system in place, that’s the best place to start. 

      A financial forecasting system can help you anticipate business cash flow trends, recurring expenses, profits, your emergency fund needs, and more. These are essential details you will need to have available before you are able to properly plan ahead to meet forecasted customer demand for goods and services. 

      Once you have your company’s financial ducks in a row, you may be ready to introduce demand forecasting into your company’s supply chain planning process. Depending on the size of your business, you might attempt to fulfill the role of demand forecaster yourself—typically with the help of software called an enterprise resource planning system or ERP. Larger and more established businesses, however, are likely to hire someone or perhaps even an entire team to manage the demand planning process on their behalf.

      Creating a Demand Planning Strategy

      Demand planning is a complicated process. Yet there are several key details an analyst might consider as they work to project your company’s upcoming inventory and staffing needs. Here are some examples of information that might go into your company’s demand planning strategy.

      • Historical data that shows your company’s past sales performance, paying special attention to seasonal shifts.
      • Market data revealing trends about how the goods and services your business sells are performing in the market at present. 
      • Collaboration data from manufacturers, suppliers, retail partners, salespeople, etc., to collect information about potential promotions, events, delays, and other occurrences that might impact future sales.
      • New product analysis and how the introduction of additional products into your business portfolio might impact the sales of existing products. 
      • Outside influences that might impact supply chains such as the economy, weather patterns, natural disasters, civil unrest, and other current events.   

      Once an analyst (or team of analysts) creates a forecast, your company can move forward and prepare for anticipated customer demand. Yet it’s critical to monitor real-time customer orders to see if those behaviors match up with what was anticipated. If not, adjustments will need to be made and a new demand forecast may be necessary. 

      In some cases, you might wind up with unplanned inventory overages. If this happens, you may also have to consider running promotions or offering discounts to encourage additional sales and avoid issues like finding extra warehouse storage space. 

      Demanding planning, unfortunately, is not an exact science. You can use the best digital tools available and hire the brightest and most experienced minds to support you. Nonetheless, there’s always room for unexpected surprises when it comes to business forecasting. As a result, part of your strategy should include making a plan for how to respond in case events don’t go according to plan.

      Why Is Demand Planning Important for Your Business? 

      Balancing supply and demand has always been one of the more difficult aspects of running a business. When you fail to manage your supply chain just right, you could wind up with dangerous amounts of unsold inventory and wasted resources and business capital. On the other side of the equation, you could risk selling out of popular products and leaving customers dissatisfied in the process and potential revenue on the table. 

      The ultimate goal of demand planning is to help maximize profits and minimize costs. At the same time, your efforts could help you increase customer satisfaction and improve the overall reputation of your brand. 

      Demand planning is an important part of your overall financial forecasting process as a small business owner. Thankfully, there are tools that can help you take some of the guesswork out of the supply chain management process. Yet as with any business tool, it’s wise to shop around and make sure you find the best fit for your company. 

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      About the author
      Michelle Lambright Black

      Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. Founder of—an online community that helps busy moms take control of their credit and finances—Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many more.

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