Sales Forecasting, Budget, Quota & Control

Sales Forecasting - Topics to be Covered

Introduction to Sales Forecast Basic Terms Used in Sales Forecasting Types of forecasting Levels of Sales forecasting Selection of forecasting Forecasting process Forecasting approaches Sales forecasting methods How to Improve Forecasting Accuracy?

Introduction to Sales Forecast

Forecasting is the art of estimating future demand by anticipating what buyers are likely to do under a given set of future condition.
A Sales forecast is a projection into the future of expected demand given a stated set of environmental conditions. Sales forecasting is a difficult area of management. Most managers believe they are good at forecasting. However forecasts made usually turn out to be wrong. Marketers argue about whether sales forecasting is a science or an art. The short answer is that it is a bit of both

Introduction to Sales Forecast.. contd

Businesses are forced to look well ahead in order to plan their investments, launch new products, decide when to close or withdraw products and so on. The sales forecasting process is a critical one for most businesses. Key decisions that are derived from a sales forecast include:- Employment levels required - Promotional mix - Investment in production capacity

Introduction to Sales Forecast.. contd

Interlink Role

Marketing Plan

Sales Forecast

Sales Force Budget

Basic terms used in Sales forecasting

Market demand for a product or service is the estimated total sales

volume in a market (or industry) for a specific time period in a defined marketing environment, under a defined marketing program or expenditure. Market demand is a function associated with varying levels of industry marketing expenditure. Market (or industry) forecast (or market size) is the expected market (or industry) demand at one level of industry marketing expenditure
Market potential is the maximum

market (or industry) demand, resulting from a very high level of industry marketing expenditure, where further increases in expenditure would have little effect on increase in demand Company demand is the companys estimated share of market demand for a product or service at alternative levels of the company marketing efforts (or expenditures) in a specific time period

Fig. Market Demand Functions

Market demand Market Potential Market Forecast Market Minimum

Industry marketing expenditure

Types of Forecasting
There are two major types of forecasting, which can be broadly described as macro and micro: Macro forecasting is concerned with forecasting markets in total. This is about determining the existing level of Market Demand and considering what will happen to market demand in the future. Micro forecasting is concerned with detailed unit sales forecasts. This is about determining a products market share in a particular industry and considering what will happen to that market share in the future.

Levels of Sales Forecasting

Seasonal

Sales Forecast

Factors to be consider
Estimates made by sales force General economic conditions Competitors actions Change in the firms prices Change in product mix Advertising and sales promotion plans Market research studies Past patterns of sales

Selection of Forecasting
The selection of which type of forecasting is use depends on the several factors which can be described as: (1) The degree of accuracy required if the decisions that are to be made on the basis of the sales forecast have high risks attached to them, then it stands to reason that the forecast should be prepared as accurately 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, food retailing, holidays); in others it is hard to find reliable, up-to-date information. (3) The time horizon that the sales forecast is intended to cover. For example, are we forecasting next weeks sales, or are we trying to forecast what will happen to the overall size of the market in the next five years? (4) The position of the products in its life cycle. For example, for products at the introductory stage of the product life cycle, less sales data and information may be available than for products at the maturity stage when time series can be a useful forecasting method

Forecasting process
Forecast Objective Determined independent and dependent variables Develop Forecast Procedure

Select forecast Analysis method Evaluate Result versus forecast Total forecast Procedure

Make & finalize forecast

Present assumption about data

Gather & analyze data

Forecasting Approaches
Two basic approaches:

Top-down or Break-down approach Bottom-up or Build-up approach Some companies use both approaches to increase their confidence in the forecast

Steps followed in Top-down / Break-down Approach

Forecast relevant external environmental factors Estimate industry sales or market potential Calculate company sales potential = market potential x company share Decide company sales forecast (lower than company sales potential because sales potential is maximum estimated sales, without any constraints)

Steps followed in Bottom-up / Build-up Approach

Salespersons estimate sales expected from their customers Area / Branch managers combine sales forecasts received from salespersons Regional / Zonal managers combine sales forecasts received from area / branch managers Sales / marketing head combines sales forecasts received from regional / zonal managers into company sales forecast, which is presented to CEO for discussion and approval

Sales Forecasting Methods

Qualitative Methods Executive opinion Delphi method Salesforce composite Survey of buyers intentions Test marketing Quantitative Methods Moving averages Exponential smoothing Decomposition Nave / Ratio method Regression analysis Econometric analysis

Sales Forecasting Qualitative Methods

Executive opinion method
Most widely used Procedure includes discussions and / or average of all executives individual opinion. Means specialists or experts are consulted who have knowledge of the industry being examined. Best Possible use: Developing a general, rather than specific product-byproduct forecast. Advantages: quick forecast, less expensive Disadvantages: subjective, no breakdown into subunits. Difficulty in allocating the forecast among individual products and sales territories bcoz the statistics have not been collected from basic market data. Accuracy: fair; time required: short to medium (1 4 weeks)

Sales Forecasting Qualitative Methods

Delphi method
A project administers a questionnaire to each member of the team which asks questions, usually of a behavioral nature. The questioning then proceeds to a more detailed or pointed second stage which asks questions about the individual company. Process includes a coordinator getting forecasts separately from experts, summarizing the forecasts, giving the summary report to experts, who are asked to make another prediction; the process is repeated till some consensus is reached Experts are company managers, consultants, intermediaries, and trade associations Advantages: objective, good accuracy Disadvantages: getting experts, no breakdown into subunits, time required: medium (3/4 weeks) to long (2/3 months)

Sales Forecasting Qualitative Methods

Sales force composite method
An example of bottom-up or grass-roots approach Procedure consists of each salesperson estimating sales. Company sales forecast is made up of all salespersons sales estimates Advantages: Salespeople are involved, breakdown into subunits possible Disadvantages: Optimistic or pessimistic forecasts, when the forecast is used for remuneration there might be a tendency for Salesperson to produce a pessimistic forecast and when remuneration is not linked to the sales forecast there is a temptation to produce an optimistic forecast. medium to long time required Accuracy: fair to good (if trained)

Sales Forecasting Qualitative Methods

Survey of Buyers Intentions Method
Process includes asking customers about their intentions to buy the companys products and services Questionnaire may contain other relevant questions Advantages: gives more market information, can forecast new and existing products, good accuracy Disadvantages: some buyers unwilling to respond, time required is long (3-6 months), medium to high cost

Test Marketing Method

Methods used for consumer market testing: full blown, controlled, and simulated test marketing Methods used for business market testing: alpha and beta testing Advantages: used for new or modified products, good accuracy, minimizes risk of national launch Disadvantages: Competitors may disturb if some methods are used, medium to high cost, medium to long time required

Sales Forecasting Quantitative Methods

Moving Average Method
Procedure is to calculate the average company sales for previous years Moving averages name is due to dropping sales in the oldest period and replacing it by sales in the newest period Advantages: simple and easy to calculate, low cost, less time, good accuracy for short term and stable conditions Disadvantages: can not predict downturn / upturn, not used for unstable market conditions and long-term forecasts

Sales Forecasting Quantitative Methods

Exponential Smoothing Method
The forecaster allows sales in certain periods to influence the sales forecast more than sales in other periods Equation used: Sales forecast for next period=(L)(actual sales of this year)+(1-L)(this years sales forecast), where (L) is a smoothing constant, ranging greater than zero and less than 1 Advantages: simple method, forecasters knowledge used, low cost, less time, good accuracy for short term forecast Disadvantages: smoothing constant is arbitrary, not used for long-term and new product forecast

Sales Forecasting Quantitative Methods

Decomposition Method
Process includes breaking down the companys previous periods sales data into components like trend, cycle, seasonal, and erratic events. These components are recombined to produce sales forecast Advantages: Conceptually sound, fair to good accuracy, low cost, less time Disadvantages: complex statistical method, historical data needed, used for short-term forecasting only

Naive / Ratio Method

Assumes: what happened in the immediate past will happen in immediate future Simple formula used: Actual sales of this year Sales forecast for next year = Actual sales of this year Actual sales of last year Advantages: simple to calculate, low cost, less time, accuracy good for short-term forecasting Disadvantages: less accurate if past sales fluctuate

Sales Forecasting Quantitative Methods

Regression Analysis Method
It is a statistical forecasting method Process consists of identifying causal relationship between company sales (dependent variable, y) and independent variable (x), which influences sales If one independent variable is used, it is called linear (or simple) regression, using formula; y=a+bx, where a is the intercept and b is the slope of the trend line In practice, company sales are influenced by several independent variables, like price, population, promotional expenditure. The method used is multiple regression analysis Advantages: Objective, good accuracy, predicts upturn / downturn, short to medium time, low to medium cost Disadvantages: technically complex, large historical data needed, software packages essential

Sales Forecasting Quantitative Methods

Econometric Analysis Method
Procedure includes developing many regression equations representing (i) relationships between sales and independent variables which influence sales, and (ii) interrelationships between variables. Forecast is prepared by solving these equations Computers and software packages are used Advantages: Good accuracy of forecasts of economic conditions and industry sales Disadvantages: need expertise & large historical data, medium to long time, medium to high cost

How to Improve Forecasting Accuracy?

Sales forecasting is an important & difficult task Following guidelines may help in improving its accuracy
Use multiple (2/3) forecasting methods Select suitable forecasting methods, based on application, cost, and

available time
Use few independent variables / factors, based on discussions with

salespeople & customers

Establish a range of sales forecasts minimum, intermediate, and

maximum
Use computer software forecasting packages

Purposes of short & long term forecasting

Appropriate production scheduling Reducing cost of purchasing R/M Determining appropriate price policy Setting sales targets and establishing controls and incentives Evolving a suitable promotional program Forecasting short-term financial requirements Planning of a new unit or expansion of an existing unit Planning of long term financial requirement Planning of man power requirement

Role of Sales forecasting in Budgeting

Sales and marketing planning Production Scheduling Cash flow projections Financial planning Capital investment Procurement Inventory management Human resource planning Budgeting

Relationship of forecasting to budgets

Sales Forecasts

Sales Budget

Sales Department Budget

Production Budget

Administrative Budget

Cash Budget Revenue Expenditure

Profit Budget Expenditure Revenue

Sales Budgeting - Topics to be Covered

Introduction to Sales Budgeting Types of Budget Budgetary procedure Effects of Errors Flexibility in Budgeting Benefits of Budgets Steps in Sales Budget procedure

Sales Budgeting - Introduction

A budget is a plan expressed usually in monetary terms. It is a process of allocating a portion of an organizations resources for its various activities for a specified period of time. Sales budget Process of allocating a portion of an organizations resources for its various sales related activities for a specific period of time. Depends on the sales forecast expected revenue and expenses. Sales budgets are developed for the smooth functioning of the sales function. A sales budget is a financial sales plan outlining how to allocate resources and selling efforts to achieve the sales forecast. Sales forecast and sales budgets are interdepartmental planning tools that require close coordinate with other marketing activities

Sales Budgeting - Introduction

A sales budget is an estimate of future sales expressed and incorporated in quantities and or money. A company will have some sort of sales projection, which will be made on a periodic basis and the sales budget will be prepared based on the both internal and external factors. The sales budget may be prepared according to products, sales territories, type of customers, salesman etc. Sales budget purposes Planning Co-ordination Control

What is Sales Budget

It includes estimates of sales volume and selling expenses Sales volume budget is derived from the company sales forecast generally slightly lower than the company sales forecast, to avoid excessive risks Selling expenses budget consists of personal selling expenses budget and sales administration expenses budget Sales budget gives a detailed break-down of estimates of sales revenue and selling expenditure

Sales Budgeting - Introduction

Features Improved planning Better communication and coordination Performance evaluation Psychological benefits Avoiding uncontrolled expenditure. It consists of three parts break even, target and projected sales. The budget also includes sales by product, location, customer density and seasonal sales patterns. It provides a plan for both cash and credit sales.

Types of Sales Budget

In practice, sales managers prepare three types of budgets Sales budgets Selling expense budget Administrative budget A sales budget gives a plan showing the expected sales for a specified period in the future. Selling expense budgets details the schedule of expenses that may be incurred by the sales department to achieve planned sales. Administrative budget specifies the budgetary allocations for general administrative expenses that would be incurred by the sales department

Factors to consider
Past sales figures and trends 2. Salesmans estimates 3. Plant capacity 4. Availability of raw material and other supplies 5. General trade prospects 6. Orders in hand 7. Seasonal fluctuations 8. Financial aspects 9. Adequate return on capital employed 10. Competition
1.

Budgetary procedure
Determining planning style-top down or bottom up Actual procedure Each management level within the sales department approves the budgets for which it is responsible, incorporates them into its own budget, and submits this consolidated budget to the next higher level for approval. Handling competition for available funds within marketing division. Selling the sales budget to top management. Using the budget for control purchases.

Effects of Errors
Expenses such as sales force commissions vary directly with volume. Expenses such as sales supervisory expenses are semi variable, fluctuating with charges in volume but not directly. If estimates unit sales volume is incorrect by much the usefulness of budgeted selling expenses figures as standards of performance is impaired.

Flexibility in Budgeting
Budget should not be rigid Full advantage of market opportunities must be taken as they appear If competitors initiate actions not foreseen at the budget making time, funds must be allocated to counter act them. A realistic attitude towards the dynamic nature of the market is a part of effective sales budgeting.

Benefits of Budgets
Ensure a systematic approach to allocation resources Develop the sales managers knowledge of profitable resources utilization Create awareness of the necessity of coordinating selling efforts with other divisions of the company Establish standards for measuring the performance of the sales organization Obtain input from all areas of the company in the profit planning process.

Steps in Sales Budget Procedure

1. 2. 3. 4. 5. 6.

Review and Analyze the situation Communicate sales goals and objectives Identify specific market opportunities and problems Develop a preliminary allocation of resources Prepare a budget presentation Implement the budget and provide periodic feedback

Step 1: - Review and Analyze the situation

Beginning with the last budget periods variances, where, when and how much were the deviations from planned performance and who was responsible? Review of past budget performance helps the sales manager avoid variances in the coming period. Changes in the current budget period, such as introduction of new products, marketing mix adjustments, or developments in the uncontrollable marketing environment, must be anticipated and worked in to the sales budget.

Step 2: - Communicate sales goals and

objectives
All management levels must be fully informed about sales goals and objectives, including their relative priorities, to ensure everyone is developing their budgets using the same assumptions. Encourage participation of all supervisors and managers in the budget process so that, having been a part of its development, they will accept responsibility for the budget and enthusiastically implement it.

Step 3: - Identify specific market opportunities

and problems
Sales manager and salesperson should use budget resources to pursue specific market opportunities. Budgets also should be allocated to dealing with problems in a timely manner.

Step 4: - Develop a preliminary allocation of

resources
Initially, assign resources to particular activities, customers, products and territories. Later you can make revision in the initial sales budget. But make all budgets as realistic as possible at each development stage to maximize their favorable impact on the organization. When you accomplish budget goals through a cooperative team effort, you create a feeling of organizational confidence.

Step 5: - Prepare a budget presentation

All organizational divisions clamor for an increased allocation of funds. Unless sales managers can justify each line item in their budgets on the basis of its profit contribution, the item will be ripe for higher management to cut.

Step 6: - Implement the budget and provide

periodic feedback
Although salespeople can be more budget conscious and provide early warning of budget overruns, the sales manager must ensure that sales revenue and cost ratio remain within reasonable budget limits. Sales manager might consider a monthly or quarterly sales budget and control chart to monitor budget variances and make timely corrective actions. They can post this on the company website or automatically distribute it via the company intranet.

Quota- Topics to be Covered

Introduction to Sales Quota Purpose of sales Quota setting Types of Sales Quotas Methods for Setting Sales Quotas Insight into Setting & Administration of Sales Quotas Administration of Quota System

Sales Quota
A sales quota is a quantitative goal assigned to a sales unit relating to a particular period of time. A sales unit may be a territory, a branch office, a region ,a distributor or a person. Sales quota provides a source of motivation, a basis for incentives, compensation and increasing standards of performance of sales person and uncover the strength and weaknesses in the selling structure of the firm Sales quotas are sales goals or targets set by a company for its marketing / sales units for a time period Marketing / sales units are regions, branches, territories, salespeople, and intermediaries Generally, company sales budget is broken down to sales quotas for various marketing units

Purpose of Sales Quota setting

1. 2. 3. 4. 5.

Providing goals and incentives to achieve a certain performance level Controlling sales persons activities Evaluating performance Controlling selling expenses Make effective compensation plan

Types of Sales Quota

1. 2. 3. 4.

Sales Volume Quotas Financial Quotas Activities Quotas Combination of these quotas

Types of Sales Quota

Sales volume quotas
For effective control, sales volume quota should be set for the smallest

marketing units, such as salesperson, districts / branches, product items / brands Sales Volume Quotas: can be measured byVolume of sales made by individuals Volume of sales made in geographical area Volume of sales made in a product line Volume of sales made in a distribution outlet Also set to balance the sales of slow moving products and fast moving products, may be set in terms of unit sales, rupee sales, may be combination or point wise
Sales volume quotas can be stated in (a) rupees / dollars, (b) units, or (c)

points

Types of Sales Quota

Sales volume quotas
Rupees / dollars sales volume quotas are appropriate when salespeople

are required to sell many products Unit sales volume quotas are suitable when
Salespeople are selling a few products Prices of the product fluctuate rapidly Price of each product / service is high

Point sales volume quotas are appropriate when the company wants salespeople to sell products that contribute more to profits

Types of Sales Quota

Financial Quotas
Financial quotas control (a) gross margin or net profits, and (b) expenses of marketing units Gross-margin / Net-profit quotas Calculate gross margin by subtracting cost of goods sold (i.e. cost of manufacturing) from sales volume. Sales managers are not responsible for cost of manufacturing Net profit quotas are generally accepted by sales mangers as it is calculated by subtracting direct selling expenses from the gross margin Expense quotas In many companies, expense quotas are stated as a percentage of sales Expense quotas to be administered with flexibility, to make salespeople cost conscious, allowing reasonable expenses

Types of Sales Quota

Activity Quotas
These are set when salespeople perform both selling and non-selling activities Objective is to direct salespeople to carry out important activities For effective implementation, activity quotas are combined with sales volume and financial quotas E.G. Calling on high potential customers, payment collection from defaulting customers

Types of Sales Quota

Combination Quotas
Used when companies want to control sales force performance on key selling and non-selling activities Focus on a few types of quotas, to avoid confusing salespeople. An example:
Type of Quota Sales Volume (Rs) Receivables (days) New Customers (Nos) Quota 5,00,000 45 04 Actual 4,50,000 50 05 Total Percent Quota 90 89 125 Weight (Importance) 3 2 1 6 Percent Quota x Weight 270 178 125 573

Total point score=573/6=95.5 for a salesperson Typically use points as a common measure to resolve the problem of different measures used by various types of quotas

Methods for Setting Sales Quotas

Several methods are used for establishing sales quotas In practice, companies use more than one of the following methods to increase their confidence in sales quotas Total market estimates Territory potential Past sales experience Executive judgement Salespeoples estimates Compensation plan We shall briefly discuss each of the above methods

Methods for Setting Sales Quotas

Total Market Estimates Method
The Process followed by established companies is as under: 1) Estimate next years total market demand, or industry sales forecast, using sales forecasting methods 2) Decide the companys estimated market share for next year 3) Companys next year sales forecast= (1) x (2) 4) Find each territorys percentage share out of the total company sales in the previous year 5) Territory sales quota = (3) x (4)

Methods for Setting Sales Quotas

Territory Potential Method
The procedure followed by new companies is as under: 1) Estimate next years industry sales forecast or market potential, using sales forecasting methods 2) Estimate multiple factor index (MFI) for each territory, based on factors that influence sales of the product. These factors are given weights corresponding to the degree of sales opportunity. 3) Industry sales forecast in a territory (or territory market potential=(1)x(2) 4) Territory sales quota = (3) x estimated market share of the company in the territory

Methods for Setting Sales Quotas

Past Sales Experience Method
The process consists of taking past one years sales (or an average of previous 3 to 5 years sales), adding an arbitrary percentage (or a percentage by which the market is expected to grow), and thus setting each territory sales quota The assumption that future sales are related to past sales may not be always correct This method should not be the only method used Past sales should be one of the factors used for deciding sales quotas

Methods for Setting Sales Quotas

Executive Judgement Method
Senior executives use their judgement when the product, territories, and

the company are new or very little market information is available Executives predict company sales budgets and also territory sales quotas This method should generally be used along with other methods

Salespeoples Estimate Method

Some firms ask their salespeople to set their own quotas Many salespersons either set very high or too low sales quotas For setting proper quotas, many sales managers use 2 or 3 of above

methods, discuss with salespersons to get their inputs, and decide sales quotas

Methods for Setting Sales Quotas

Compensation Plan Method
Some organizations set quotas to fit with their sales compensation plan E.G. A company wants to pay a monthly salary of Rs 5000, and a commission of

3% on monthly sales above Rs 1,00,000. The quota of Rs 1,00,000 is set in such a way that salesperson would find it very difficult to cross total compensation of Rs 8000 per month (5000+3000) Sales quotas should not be based only on this method

Insight into Setting & Administration of Sales Quotas

Set realistic quotas Understand problems in setting quotas Ensure salespeople understand quotas By allowing salespeople to participate in the process By continuous feedback to salespeople on their performance compared to quotas Have flexibility in administering quotas Change quotas in cases of major changes in market demand or company strategies Use monthly or quarterly quotas for incentives and annual quotas for performance evaluation Select a few quotas that have relationships with marketing environment and sales situations

Administration of Quota System

The skill in administering the quota system is very important to realize the full benefit for control purpose and also to secure cooperation among staff . Accurate, fair and attainable quotas Securing and maintaining sales personnel's acceptance Participation of sales personnel Keeping sales personnel informed

Control - Topics to be Covered

Introduction to Sales Control Goals of Sales Control Systematic view of Sales Control

Control
Control was defined as a process used by managers to direct, regulate, and restrain the actions of people so that the established goals of an enterprise may be achieved. Revenue control is clearly an important goal of sales control, but it is not the only one.

Sales Control - Introduction

Like any other control system, sales control requires the establishment of standards, the evaluation of actual performance and the correction of deviation in performance. Sales control implies not only managerial action with regard to actual sales, but it also embraces all other marketing functions required for the even flow of products or services form producers to consumers. All promotional and auxiliary efforts in marketing require as much control as the actual selling efforts demand. Nevertheless, control of promotional and auxiliary efforts in marketing is more difficult and cannot be exercised with that exactness which is possible in case of actual selling efforts

Sales Control Introduction. contd

Because of their intangible performances, ancillary activities in marketing are placed under some broad measures of control, and they are measured and appraised by managerial judgment, skill or experience. The basic tool for controlling these efforts is to be found in the sales expense budget . For controlling performances of salesmen, the sales budget or in the absence of a sales budget, the sales programme provides the standard for control.

Goals of Sales Control

Optimize number of sales Maximize profit Control revenue

Systematic View of Sales Control

Sales Control

Behavioral Aspects

Cost Aspects

Sales Effort

Allocation of Selling-Time

Performance Expenses

Sales-function Administration

Reference Books
1. 2. 3. 4.

Sales Management Still, Cundiff & Govani. Prentice Hall India Professional Sales Management Anderson, Hair & Brush. Tata McGraw Hill Management of Sales force Stanton & Sprio. McGraw Hill International Sales Management Futrell 6th edition. Thomson South Western