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What is Sales Forecasting?

A sales forecasting is a projection of the expected customer demand for products or services at a specific company, for a specific time horizon, and with certain underlying assumptions Essential tool used for business planning, marketing, and general management decision making. Sales forecasting can help a firm to achieve sales goals. Sales forecasting can help drive sales revenue, improve efficiency, increase customer retention and reduce costs.
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Sales forecasting is estimating what a company's future sales are likely to be in the future. It is a projection into the future of expected sales, given a stated set of environmental conditions. Sales forecasting plays a vital role in sales planning, budgeting and decision making. Forecasting in marketing is partly art and partly science. The blend of the two is fundamental for successful forecasting. The amount of each varies from one situation to another. The contribution of science comes from application of various statistical techniques used to analyze past data about a market The contribution of art lies in an ability to link experience of, and feel for, a market with the results of various analyses, plus the ability to assess the significance of factors which can not yet be included in the statistical analysis and the effects of which may not yet have been experienced.
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Sales Forecasting

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 amount of supplies To hire the required number of people

Factors affecting sales forecasting

Internal Factors Labour problems Inventory shortages Working capital shortage Price changes Change in distribution method Production capability shortage New product lines
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Factors affecting sales forecasting

External Factors Relative state of the economy Direct and indirect competition Styles or fashions Consumer earnings Population changes Weather

Sales Forecasting
There can be two approaches to sales forecasting:
- Break down approach and Build up approach. In Break down approach the companys internal and external environments are studied to determine the significant factors that influence the sales.

The internal factors studied are: Pricing Product changes Distribution Promotion Resources available finance, facilities, material, labour. Management skills Technology. The external factors studied are: General economy Industry related activities Competition Government laws and regulations.
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Sales Forecasting
The steps in Break down methods are: 1. General environment forecast 2. Industry sales forecast 3. Company sales forecast 4. Sales forecast for product lines 5. Individual product forecasts. In Buildup approach, estimated sales figures for individual products/market segments are totaled up to arrive at forecast figures. This can be rather cumbersome process if the organisation has many product varieties serving multiple markets.

 Sales forecasting methods:

Qualitative methods

Sales Forecasting

Experts opinion method Delphi method Sales force composite method Survey of buyers expectation method / User expectation method / End-use method Extrapolation method Moving Average method Exponential Smoothening method Time series analysis Regression analysis Test marketing.
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Quantitative methods (statistical methods)

Market Research methods

Significance of Forecasting
An essential element of planning. It means estimating future sales on a systematic basis. Almost every business executive makes sales forecasting. Has assumed great importance in the modern business world which is characterized by growing competition, rapidity of changes in environment, fast technological changes and increased government control.

Sales Forecasting
Importance of Sales forecasting and its role can be understood from the following: Sales forecasts are vital to the efficient operation of the firm and can aid managers on such decisions / areas such as: Future investments in new ventures, capacity expansion, resource allocation to functional areas, cash flow projections etc. Material requirement planning, inventory to carry. Personnel requirement planning. Planning marketing and sales programs and to allocate resources among the various marketing activities such as advertising, distribution etc. Deciding on proper price to charge, and the salaries to pay salespeople.
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Advantages
(i) For effective planning by providing a scientific and reliable basis for anticipating future operations such as production, inventory, supply of capital and so on. (ii) For reducing the area of uncertainty that surrounds management decision-making with respect to cost, production, profits, pricing, etc.

(iii) Making and reviewing on a continuous basis will compel the managers to think ahead and to search for the best possible decisions with a dynamic approach.
(iv) For efficient managerial control as Forecast of sales a must in order to control the costs of production and the productivity of personnel.

Limitations of Forecasting
All forecasts are subject to a degree of error and they can never be made with a hundred percent accuracy. Guesswork can never be omitted from forecasting, though it can be reduced with the help of modern quantitative techniques. Managers often neglect to examine whether the forecasts are supported by reliable information. Managers must use their knowledge, experience and available information with a great degree of skill and take care to make forecasts more dependable.

Sales Forecasting Methods

Qualitative
Executive opinion method Delphi Method

Quantitative
Time Series Analysis Market Test Method

Sales force composite method Survey of Buyers intentions

Regression Analysis

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Executive opinion method

Most widely used Method of combining and averaging views of several executives regarding a specific decision or forecast. Leads to a quicker (and often more reliable) result without use of elaborate data manipulation and statistical techniques.

Delphi Method
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
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Sales force composite method

Also known as Grassroots Approach Individual salespersons forecast sales for their territories Individual forecasts are combined & modified by the sales manager to form the company sales forecast. Best used when a highly trained & specialized sales force is used.

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Survey of Buyers intentions

Process includes asking customers about their intentions to buy the companys product and services Questionnaire may contain other relevant questions

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Time Series Analysis

Make forecasts based purely on historical patterns in the data. It has four components The Trend component-Gradual upward or downward movement over time.

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Moving Averages
The sales results of multiple prior periods are averaged to predict a future period Called moving because it is continually recomputed as new data becomes available, it progresses by dropping the earliest value and adding the latest value.

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Exponential Smoothing
Similar to moving average method Used for short run forecasts Instead of weighing all observations equally in generating the forecast, exponential smoothing weighs the most recent observations heaviest Next years sale=a(this years sale) + (1-a)(this years forecast) a is smoothing constant taken in scale 0-1

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Market Test Method

Used for developing one time forecasts particularly relating to new products A market test provides data about consumers' actual purchases and responsiveness to the various elements of the marketing mix. On the basis of the response received to a sample market test, product sales forecast is prepared.

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Regression Analysis
Identifies a statistical relationship between sales(dependent variable) and one or more influencing factors, which are termed the independent variables. When just one independent variable is considered (eg. population growth), it is called a linear regression, and the results can be shown as a line graph predicting future values of sales based on changes in the independent variable. When more than one independent variable is considered, it is called a multiple regression
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Benefits of Sales Forecasting

Better control of Inventory Staffing Customer Information Use for Sales People Obtaining Financing

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Limitations of Sales Forecasting

Part hard fact, part guesswork Forecast may be wrong Times may change

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