Chapter 5

Sales Forecasting
and Budgeting
PowerPoint presentation prepared by
Dr. Rajiv Mehta
New Jersey Institute of Technology

Chapter Outline
Sales Forecasting and Its Relationship to
Operational Planning
Forecasting Approaches and Techniques
Evaluating Forecasting Approaches
Sales Budget Planning
Preparing the Annual Sales Budget

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5|2

Learning Objectives
After reading this chapter, you should be able to do
the following:
1. Relate sales forecasting to operational planning.
2. Use the most popular quantitative and qualitative sales
forecasting tools.
3. Evaluate the various sales forecasting techniques.
4. Identify the purpose and benefits of sales budgets.
5. Prepare an annual sales budget.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5|3

Sales Forecasting and Its

Relationship to Operational Planning

A sales forecast is a prediction of

the future market potential for a
specific product. It sets the sales
expectations for a given time
period and can indicate what types
of products customers are likely to
want.

Market potential is a quantitative

estimate, in either physical or
monetary units, of the total sales
for a product within a market.

Sales potential is the portion of

market potential that one among a

set of competing firms can
reasonably expect to obtain.
Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5|4

Reasons Why Forecasting Is Important

sales and marketing
planning
production scheduling
cash flow projections
financial planning
capital investment
procurement
inventory management
human resource planning
(hiring salespeople)
budgeting

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5|5

Impact of Erroneous Sales Forecasts

Functional area

Forecast
Too high

Too low

Production

excess output,
unsold products

inadequate output
to meet customer
demand

Inventory

overstock

understocks

Finance

idle cash

cash shortage

Promotion

wasted
expenditures

insufficient
expenditures to
cover the market

Distribution

costly,
inadequate to
insufficient to sell reach market
excess products

Pricing

reductions to sell
excess products

Sales force

too many
salespeople, high
Copyright Houghton Mifflin Harcourt Publishing Company.
All rights
reserved.
selling
costs

price increases to
allocate scarce
products
too few
salespeople,
market not covered

5|6

Sales and Operational

Planning Process (S&OP)

Analyze
sales
records.

Develop a
preliminary
forecast.

Have
managers
review
and
adjust
forecast.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

Build a
sales plan
around
the
forecast.

Make
adjustments
to
operating
plans.

5|7

Characteristics of Successful S&OP Programs

All managerial levels
must support the
S&OP process and the
plans that result.

Firms dont know how

well theyre doing
unless they measure
outcomes.

Regular meetings are

held.
Metrics monitor
progress and provide
benchmarks.

1.
People
5.
Performance

2.
Process

Successful
S&OP
programs

4.
Strategy
Effective strategy
should align supply
and inventories with
demand.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

3.
Technology
Market intelligence
and decision support
system are in place
for reports that assist
in planning.
5|8

Estimating Industrial Demand

Survey potential industrial
customers to measure their
purchase intentionsthe
likelihood they will actually
purchase a given product.

1.
Standardized
classification
systems

Estimating
industrial
demand
approaches

2.
Buyer
intentions

North American Industrial

Classification System (NAICS)
has replaced the original SIC.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5|9

Steps in Forecasting Sales

Using the Breakdown Approach
1. Forecast general economic conditions.
2. Estimate the industrys total market
potential for a product category.
3. Determine the share of this market the
company currently holds and is likely
to retain in view of competitive efforts.
4. Forecast sales potential of the product.
5. Use the sales forecast for operational
planning and budgeting.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 10

Sales Forecasting
Model: Breakdown Approach

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 11

Forecasting Approaches
and Techniques
based on primary research

1.
Breakdown
approach

Forecasting
approaches and
techniques

2.
Build-up
approach

Forecast economic conditions, such as

these:
GNP
consumer price index
wholesale price index
interest rates
unemployment levels

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 12

Sales Forecasting Techniques

1.
Nonquantitative
methods

Sales
forecasting
techniques

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

2.
Quantitative
methods

5 | 13

Nonquantitative Forecasting Methods

Nave forecast assumes that the next periods sales will be the same as they were in the previous
period.
Jury of executive opinion method asks key managers within the company for their best estimate of
sales in a given planning horizon and combines the results to develop the forecast.
Sales force composite method is similar, but it asks the sales force for their best estimates of sales in
the planning horizon.

1.
Judgment
methods

Nonquantitative
forecasting
methods

2.
Counting
methods

survey of customers buying

intentions
test marketing

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 14

Quantitative Forecasting Methods

moving averages
exponential smoothing
Box-Jenkins
trend analysis using ARIMA

1.
Time-series
methods

Quantitative
forecasting
methods

2.
Causal or
association
methods

correlation-regression
econometric model
Input-output models

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 15

Statistical Software for

Sales Forecasting
To learn about SAS, the leader in business intelligence
and predictive analytics software, go to
http://www.sas.com

To read about the firms in various industries that use SAS

software to make better, faster, intelligent business
decisions, go to
http://www.sas.com/software/index.html

To read white papers and success stories on sales

forecasting and data management by solution, industry,
and technology, go to
http://www.sas.com/apps/forms/index.jsp?id=wp&cid=3880
http://www.sas.com/success/index.html

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 16

Articles on Sales Forecasting

To sharpen your skills by reading interesting articles on
sales forecasting purposes, techniques, and procedures,
go to
http://www.inc.com/magazine/19971101/1353.html
http://www.zeromillion.com/business/sales-marketing/salesforecasts.html
http://www.salesvantage.com/article/view.php?
w=628&The_Key_to_Accurate_Sales_Forecasting/

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 17

Articles on Sales Forecasting

For interesting articles on choosing the right sales
forecasting method as well as becoming a forecasting
savant, go to
http://www.salesvantage.com/article/list.php?c=15
http://www.salesvantage.com/article/view.php?
w=724&Sharpen_Your_Competitive_Advantage_Using_Techniq
ues_that_Makes_you_a_Forecasting_Savant/

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 18

Time-Series Methods
Using historical data to predict sales, forecasters look
for the following:
1.Trends are movements in a time series as a result of

developments in population, technology, or capital formation.

2.Periodic movements are consistent patterns of sales

changes in a given period generally called seasonal
variations.

3.Cyclical movements are wave-like movements of sales

that are longer in duration than a year, such as business
recessions.

4.Erratic movements are one-time specific eventssuch

as wars, strikes, snowstorms, hurricanes, fires, and floods

that are not predictable.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 19

Types of Time-Series Methods

1.
Moving
averages

Moving averages are

forecasts developed using
a moving average to
predict future sales as a
mathematical function of
sales in recent time
periods. As the
forecasters add each new
periods sales data to the
average, they remove
from the total the data
from the oldest period.

Time-series
methods

3.
ARIMA

An autoregressive integrated
moving average (ARIMA)
model is based on the moving
average concept. The model
incorporates information
about trends by spotting
patterns in the fluctuations in
data.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

2.
Exponential
smoothing

Exponential smoothing is
a type of moving average
that represents the
weighted sum of all past
numbers in a time series,
with the heaviest weight
placed on the most
recent data.

5 | 20

Types of Causal or
Association Methods
1.
Correlationregression
analysis

Causal/association
methods attempt to
identify the factors
affecting sales and to
determine the nature of
the relationship
between them.

Causal or
association
methods

3.
Input-output
models

2.
Econometric
models

Econometric models
are based on a series
of regression
equations.

Input-output models are

complex systems showing
the amount of input
required from each
industry for a specified
output of another industry.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 21

Correlation-Regression Analysis
1.
Correlation
analysis

A correlation analysis
helps calculate the
strength of the
association between
two variables.
Correlations do not
imply cause and effect.

Correlationregression
analysis

3.
Multiple
regression
analysis

Multiple regression analysis

is a statistical approach to
predicting a dependent
variable, such as sales, using
several independent
variables, such as
advertising expenditures and
price simultaneously.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

2.
Simple
regression
analysis

Simple regression
analysis is a statistical
approach to
predicting a
dependent variable
such as sales, using
one independent
variable such as
advertising
expenditures.

5 | 22

Criteria for Evaluating

Forecasting Methods
1. Comprehensibility: Sales managers
must understand the basic methods of
developing forecasts.

2. Accuracy: A forecasting method must

provide results that are sufficiently accurate

for the purpose desired.

3. Timeliness: The forecasting method must

generate forecasts in time for managers to
use them.

4. Quality and quantity of information:

In forecasting as in other areas, garbage

input leads to garbage output (GIGO).

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 23

Criteria for Evaluating

Forecasting Methods
5. Qualified personnel: Experts can

give opinions on qualitative

techniques like the jury of executives
opinions or the Delphi method.

6. Flexibility: Managers continually

monitor actual sales for any

deviations from forecast that may
indicate the need for revised
sales forecasting
tools.

7. Costs/benefits: The benefits

from

forecasting must more

than offset the
costs of
generating the sales forecast.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 24

Sales Budget Planning

A sales budget is a financial sales plan outlining how to allocate resources and
selling efforts to achieve the sales forecast.
1.
Planning
function

Budgeting is an
operational planning
process expressed in
financial terms, which
provides a guide for
action toward achieving
the organizations
objectives.

Sales
budget
uses

3.
Controlling
function

2.
Coordinating
function

The control function of a

sales budget is to
evaluate actual results
against sales budget
expectations.

Sales budgets must be closely

integrated with budgets for
other marketing functions.

Differences between them are known as budget variances.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 25

Benefits of Preparing the

Annual Sales Budget
The following are benefits of preparing the annual
sales budget:
ensure a systematic approach to allocation
resources
develop the sales managers knowledge of
profitable resource use
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
Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 26

Budget Preparation Steps

Sales
Sales managers must
provide
provide early
early warning
of
budget
of budget overruns and
ensure
ensure that
that sales
sales
revenue
revenue and cost ratios
remain
remain within
reasonable
reasonable budget
limits.
limits.

Common
Common line
line items
items in
in sales
sales
budgets
budgets include
include these:
these:
salaries
salaries
direct
direct selling
selling expenses
expenses
commissions
commissions and
and bonuses
bonuses
promotional
promotional materials
materials
advertising
advertising

All
All management
management levels
levels
must
must be
be fully
fully informed
informed
about
about sales
sales goals
goals and
and
objectives.
objectives.

1.
1.
Review
Review and analyze
analyze
the
the situation
situation
6.
Implement
Implement the budget
budget
and
and provide
provide periodic
periodic
feedback
feedback

Budget
preparation
steps

5.
5.
Prepare
Prepare aa budget
budget
presentation
presentation

Succinct,
Succinct, wellwellreasoned
reasoned written and
and
oral
oral budget
budget
presentations
presentations can be
used
used to
to ask
ask for
for
increased
increased allocation
allocation of
of
funds.
funds.

4.
4.
Develop
Develop aa preliminary
preliminary
allocation
allocation of
of
resources
resources

Assign
Assign resources
resources to
to
particular activities,
customers, products,
and territories.

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

2.
2.
Communicate
Communicate sales
sales
goals
goals and
and
objectives
objectives

3.
3.
Identify
specific
Identify specific market
market
opportunities and
problems
problems

Sales
Sales managers
managers and
and
salespeople
salespeople should
should use
use
budget
budget resources
resources to
to
pursue
pursue specific market
opportunities
opportunities and
and deal
deal
with
problems
with problems on a
timely
timely basis.
basis.

5 | 27

Statistical Software for Sales Budgeting

To read an interesting article about sales
budgeting software, go to
http://www.ferret.com.au/articles/z1/view.asp?
id=101285

To learn about a sales budgeting software go to

http://www.managingautomation.com/maonline/director
y/product/Data_Perceptions_Prophecy_Sales_Forecast
ing_and_Budgeting_Software_3604491

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 28

Articles on Sales Budgeting

To augment your understanding of the link
between sales forecasting and budgeting, go
to
http://www.allbusiness.com/accountingreporting/budget-budget-forecasting/977-1.html

To broaden your understanding of sales

budgets in international operations, go to
http://findarticles.com/p/articles/mi_m0OOL/is_2_5
/ai_n6118710/pg_5

Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 29

Ethical Situation: What Would You Do?

Discussion Question
As one of the newer district sales managers for a fast-growing technology
company, youve asked your salespeople to give you three sales forecasts in
their territories for the coming year: (a) optimistic, (b) pessimistic, and (c) most
likely. After totaling their three different sales forecasts, you realize that the
optimistic forecast will increase sales by nearly 20% in your district, the
pessimistic forecast by 10%, and the most likely by about 15%. Your national
sales manager has asked each district sales manager to give her their most
likely sales forecast for the coming year, so she can assign sales quotas. Your
thoughts are that its probably best to give her the most pessimistic sales
forecast because this should help ensure that she assigns your district a quota
that you should easily achieve. If you can exceed your assigned district sales
quota by a substantial amount, youll probably get a large bonus, and you may
even be named district sales manager of the year for your company. You know
that your companys production schedules are based on the annual sales
forecasts, but you plan to be very aggressive early in the year in ordering
products to make sure you get more than your share for your salespeople
before possible inventory shortages come later. You dont see any personal
down side to this strategy.
Copyright Houghton Mifflin Harcourt Publishing Company. All rights reserved.

5 | 30