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Sales Forecasting
& Budgeting
Chapter 9 &10
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Sales Forecast
It is estimate of a companys sale for a specifiedfuture period.
Sales forecasting provides the starting point forassumptions used in various planning activities.
It is used for the short-term financial control
systems. The financial budget is dependant uponthe sales forecast for the projected revenue figures.
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Human resource executives use sales forecaststo project staffing needs, financial executives useit in establishing and controlling operating and
capital budgets, andproduction manageruses itto schedule purchasing and production to controlinventories.
It is thus a very vital planning task for any
organization.
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Sales Forecasting Concepts
There are 5 levels of concern in sales forecasting:
(a) Market Potential(b) Sales Potential
(c) Actual Sales Forecasts
(d) Sales Quotas
(e) Sales Budgets
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Market Potential it is the highest possible expectedindustry sales of a good or service in a specified marketsegment for a given time period.
e.g. the market potential for the sales of antifreeze in NewEngland might be 20 millions gallons annually. (Based onbuyers ability to buy and willingness to buy)
Sales Potential refers to an individual firms market share ofthe market potential, where market share is defined as thepercentage of market controlled by a particular company orproduct. It is the maximum sales a firm can hope to obtain.
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Sales Forecasts is the sales estimate the company actuallyexpects to obtain, based on the market conditions, companyresources, and the firms marketing plan. The sales forecast isless then the sales potential since it is based on realistic set of
circumstances.
Sales Quota is a sales goal assigned to a sales person,region or a team. They are usually derived from the salesforecasts. Sales goals and objectives sought by management.
Sales Budgets a management plan for the expenditures toaccomplish sales goals.
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Product Life Cycle
Important sales planning and control tool; it projects the changes in aproducts sale/profits that occurs over time.
Introduction stage There is no historical sales record and new
products have a high failure rate, so it very important to preparerealistic estimate of potential sales, based on thorough marketingresearch.
Growth stage if the product gains market acceptance.
Sophisticated mathematical models are used here to projectmarket share and estimate sales.
Maturity and Decline stage traditional forecasting techniquesare appropriate. Historical data can be analyzed statistically toproject sales.
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Sales Forecasting Procedures
There are basically 3 steps in sales forecasting process:
3. Preparing a forecast for general economic
conditions
5. Preparing a forecast of industry sales
7. Preparing a forecast of the product or company
sales
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1. Forecasting General Economic Conditions
It is measuring the GDP, which is the value of goods
and services produced within a country during a
given year.
Some of the others factors are; stock market
fluctuation, personal income, level of employment,
consumer price index etc. These data are usuallyavailable from government or trade associations.
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2. Estimating Industry Sales
Small firms often rely on industry estimates
available from trade associations and government
sources.
In other cases more sophisticated quantitative
techniques are used to determine. Large
organizations have economist and analysts who
provides support and information for sales
forecasts.
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3. Estimating Company and Product Sales
Forecasting methods can be classified as either
qualitative or quantitative.
Qualitative methods rely upon subjective opinions or
judgments, where as Quantitative technique applies
statistical methods.
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Qualitative Methods
(1) Jury of executive opinion:
Panel charged with developing a sales forecast. The
group has executives from different departments likemarketing, sales, marketing research, finance,production, operations etc.
Each member is asked to provide an estimate offuture sales with written justification. The opinionsare then pooled and analyzed at group meetings.The advantage is its simplicity, but might take toomuch time of the executives involved.
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(ii) Delphi Technique
Group of experts used to make long-range projections.
Issues like future direction of business conditions,business activities, technology, new product
development, and market conditions. These experts are kept apart from each other so thattheir opinions are established independently.
They prepare individual forecasts, which are thencompiled and then given back to them for a secondround of projections.
This process continues until a consensus forecast ofthe future emerges. The Delphi technique has theadvantage of eliminating the group pressures of a
typical committee meeting.
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(iii) Sales Force Composite
Forecasts arrived at by combining salespersons
estimates of expected sales for their respective
territories.
Field sales people should be motivated to acceptsales quotas when they know that the information
they supplied played a major role in forecasting.
A major disadvantage is that sales people might be a
poor judge of future sales level or market conditions.They can have bias opinions as well.
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(iv) Survey of Buyers Intention
Forecast survey of a limited and well-defined
group of buyers. This is when the potential
customers are well defined and limited in number,
such as industrial products.
Disadvantage is that a customer might not always
do what they say and they plan to do. Secondlycustomer-buying behavior might alter in response
to change in the operational environment.
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Quantitative Methods
Continuity Extrapolation technique that attempts toproject the last increment of sales change into thefuture.
Time series analysis projection of the averageincrement of sales change into the future. A timedata series is determined by four basic elements of
sales variations (a) trends or long run changes (b)cyclical changes (c) seasonal variations (d)unexpected factors. Most form of times seriesanalysis use a moving average to analyze andproject sales.
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Exponential smoothing a weighted average timeseries analysis. Actual sales of recent periods areweighted more heavily then the average sales ofearlier periods.
Regression and correlation analysis aim ofregression analysis is to identify factors thatinfluence, or are closely associated with changes in
sales. A simple regression is a forecasting techniqueusing only one independent variable. While multipleregressions uses two or more independent variables.
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Sales Budgeting
Estimating future levels of revenue, sellingexpenses, and profit contributions of the sales
function.
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Types of Budget
Financial statement that outlines firms intended actionsand the resulting cash flow consequences. Most salesbudgets covers a period of one year, but they are oftenbroken down into quarterly or even monthly targets.
Sales budget projection of revenue computed fromforecast unit sales and average prices.
Selling expenses budget approved amount that thedepartment will spend to obtain the revenues projected in thesales budget.
Profit budget merged sales budget and the selling
expense budget to determine gross profit.
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Major Types of Selling Expense Budgets
Affordable methods management determines what tospend on selling after accounting for the cost of good soldand the desired profit level.
Percentage of sales method the funding level is foundby multiplying the sales revenue by a given percentage.Budgeting is based on anticipated rather then historicalrevenue.
Competitive parity method sales budgeting methodbased on the competitive practices in an industry. Theyrefer to either a specific competitor or the industryaverage.
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Objective and task method budget allocation is based onthe objective of the firm, tasks necessary to achieve thoseobjectives, and the expenses related to those tasks. It isknown as zero-based budgeting.
Bidding system in this the sales function competes withother functions for limited funds available on the basis ofpayoffs.
Return on investment (ROI) some sales managers havebegun to use this financial management concept to chosebetween alternative courses of action. ROI is determined bydividing net income by total assets employed to earn theincome.
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Sales Budgeting Procedures
1. Situational Analysis sales managers have to look at the magnitude ofpast differences between budgeted and actual figures and the reasons for thesedifferences.
2. Identification of Problems and Opportunities the actual potential threatand challenges has to be assessed and addressed to determine the
probabilities of occurrence their impact.
3. Development of Sales Forecast manager is equipped to forecast sales,using one of the various methods. Projections are made about the anticipatedlevels of sales by territory, product or type of account. It is expressed both inunits and dollars.
4. Formulation of Sales Objectives once the forecast has been developed,sales force has to be told what sales target to strive and what objectives topursue.
5. Determination of Sales Tasks sales manager and sales force have tocarry a broad array of sales activities, ranging from recruitment to evaluation,
and from prospecting to after sales service.
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6. Specification of Resource Requirement the resources that will berequired to implement the specified activities and achieve the objectives.
7. Completion of Projections here all the input and requests from variousunits of the sales function are assembled and tied into a comprehensivepackage.
8. Presentations and Review present and defend its sales budget proposalto the management.
9. Modification and revision sales managers have to engage in a seriesof compromise sessions. Here the sales targets and budgets might be
adjusted by the higher management, reflecting both to the needs of thecorporation and the true potential of the marketplace.
10. Budget approval final levels are eventually approved and authorizedfor both the sales and the selling expense budgets. Here onwards budgetsare reviewed periodically looking at the on going market conditions and otherexternal forces.
