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SALES FORECASTING

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Sales Forecasting

Introduction

Sales forecasting is a difficult area ofmanagement. Most managers believe theyare good at forecasting. However, forecastsmade usually turn out to be wrong!

Marketers argue about whether salesforecasting is a science or an art. The shortanswer is that it is a bit of both.

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Reasons for undertaking salesforecasts

Businesses are forced to look well ahead in orderto plan their investments, launch new products,decide when to close or withdraw products and so

on. The sales forecasting process is a critical onefor most businesses. Key decisions that arederived from a sales forecast include:

- Employment levels required- Promotional mix- Investment in production capacity

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Types of forecasting

There are two major types of forecasting, whichcan be broadly described as macro and micro:

Macro forecasting is concerned with forecastingmarkets in total. This is about determining theexisting level of Market Demand and consideringwhat will happen to market demand in the future.

Micro forecasting is concerned with detailed unitsales forecasts. This is about determining a

products market share in a particular industry andconsidering what will happen to that market sharein the future.

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The selection of which type of forecasting to use

depends on several factors as under:

(1) The degree of accuracy required if the decisions that are to bemade on the basis of the sales forecast have high risks attached tothem, then it stands to reason that the forecast should be prepared asaccurately as possible. However, this involves more cost

(2) The availability of data and information - in some markets there

is a wealth of available sales information (e.g. clothing retail, foodretailing, holidays); in others it is hard to find reliable, up-to-dateinformation

(3) The time horizon that the sales forecast is intended to cover.For example, are we forecasting next weeks sales, or are we trying toforecast what will happen to the overall size of the market in the nextfive years?

(4) The position of the products in its life cycle. For example, forproducts at the introductory stage of the product life cycle, less salesdata and information may be available than for products at thematurity stage when time series can be a useful forecasting method.

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Creating the Sales Forecast for aProduct

The First stage in creating the sales forecast is toestimate Market Demand.

Definition:

Market Demand for a product is the totalvolume that would be bought by a definedcustomer group, in a defined geographicalarea, in a defined time period, in a givenmarketing environment. This is sometimesreferred to as the Market Demand Curve.

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Stage two in the forecast is to

estimate Company Demand Company demand is the companys share of market

demand.

This can be expressed as a formula:

Company Demand = Market Demand v/s CompanysMarket Share

A companys share of market demand depends on how itsproducts, services, prices, brands and so on are perceivedrelative to the competitors. All other things being equal, thecompanys market share will depend on the size andeffectiveness of its marketing spending relative tocompetitors.

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Step Three is then to develop theSales Forecast

The Sales Forecast is the expected level of company salesbased on a chosen marketing plan and an assumedmarketing environment.

Note that the Sales Forecast is not necessarily the same

as a sales target or a sales budget. A sales target (or goal) is set for the sales force as a way

of defining and encouraging sales effort. Sales targets areoften set some way higher than estimated sales to stretchthe efforts of the sales force.

A sales budget is a more conservative estimate of theexpected volume of sales. It is primarily used for makingcurrent purchasing, production and cash-flow decisions.Sales budgets need to take into account the risks involvedin sales forecasting. They are, therefore, generally setlower than the sales forecast.

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Methods of sales forecasting

Survey methods:Based on the opinion of buyers &consumers. First We select thepotential buyers/consumers thencollects their opinions for forecasting.

Expert opinion:A company invites the opinions ofexecutives and consultants whoacknowledged experts in studying salestrends. By the opinions, it forecastfuture sales. This estimate is alsobased on past performance.

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Market test methods:

Its used for the changing consumerbehavior prices,advertising,expenditureetc. It allows management to know howconsumer will buy go for a particularproduct.

Sales force opinion: Estimates thebuyers intention from experiencedpersonnel in the sales force. They can

easily forecast for their respectiveterritories. This method can be usedonly when the firm has competent high-caliber sales personnel.

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Statistical methods:

Its superior techniques because their

reliability is higher than that of othertechniques.

A. Trends methods.

B. Graphical methods.C. Time series methods.

(i) freehold methods.

(ii) Semi average methods.

(iii) Moving average methods.

(iv) Methods of least squares.

D. Regression line.

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Advantages of Forecasting (i) Foreffective planningby providing a scientific and

reliable basis for anticipating future operations suchas production, inventory, supply of capital and so on.

(ii) Forreducing the area of uncertaintythat surroundsmanagement decision-making with respect to cost,production, profits, pricing, etc.

(iii) Making and reviewing on a continuous basis willcompel the managers to think ahead and to search forthe best possible decisionswith a dynamic approach.

(iv) Forefficient managerial controlas Forecast ofsales a must in order to control the costs ofproduction and the productivity of personnel.

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Limitations of Forecasting

All forecasts are subject to a degree of errorandthey can never be made with a hundred percentaccuracy. Guesswork can never be omitted fromforecasting, though it can be reduced with the helpof modern quantitative techniques.

Managers often neglect to examine whether theforecasts are supported by reliable information.Managers must use their knowledge, experienceand available information with a great degree of skilland take care to make forecasts more dependable.

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Sales Forecasting - Why is it

necessary? To increase the profitability. To increase the revenue.

To increase the customer base.

To retain more and more customer. To raise the necessary cash for

investment and operations

To establish capacity and output levels

To acquire and stock the right amountof supplies

To hire the required number of people

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