CHAPTER 5: SALES FORECASTING AND BUDGETING

What is the importance of forecasting?

Without a short-term forecast – sales managers would not have a logical basis for assigning workloads
or deciding where to concentrate the sales effort.

Without a long-term forecast –sales managers would not know how many salespeople the firm will
need or how many should be promoted to a sales management position.

I. SALES FORECASTING AND ITS RELATIONSHIP TO OPERATIONAL PLANNING

Sales forecast –is a prediction of the future market potential for a specific product, it sets the sales
expectations for a given time period.

A forecast provides the “how far” by estimating the amount of sale possible in a given situation and it
also gives the direction by indicating what types of products customers are likely to want.

Sales forecast provide an assessment of both:

1. Market Potential – is the quantitative estimate, in either physical or monetary units of total
sales for a product within the market.
2. Sales Potential – is the portion of market potential that one among set a competing firms can
reasonably expect to obtain.

Sales managers use market and sales information in making critical operational decision making, setting
logical sales goals for different sales territories and individual salespeople sometimes known as quotas.

Forecast of sales potential, is the starting point for sales and marketing planning, production
scheduling, cash flow projections, financial planning, capital investment, procurement inventory
management, human resource planning and budgeting.

Accurate sales forecast are also important for avoiding unfavorable inventory situation.

Computation of sales forecast to calculate how many sales people are needed (pg. 117)

A. Sales and Operational Planning: S&OP

An organized process that uses sales inputs to forecast business for upcoming period of
varying length.

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 • Analyze sale record

• Development a preliminary forecast

• Have managers review forecast and adjust

• Build a sales plan around the forecast

• Make adjustment to operating plans

Contingency – refers to events that are conceivable, but less likely than those based
directly on the forecast.

Five characteristics of successful S&OP:

B. Estimating Consumer Demand.

Buying Power Index –uses a weighted combination of population, income and retail sales,
expressed as a percentage of the national potential, to identify a given market’s ability to buy.

C. Estimating Industrial Demand.

Two approaches how firms estimate industrial demand:
1. Standard Industrial Clarification (SIC) –a uniform numbering system for
categorizing all industries according to their particular product or operation.

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 2. Conduct survey of buyer intention, carried out by the sales force, the in-house
marketing research staff and or an outside research agency,

Standardized Classification System –the most widely used approach to estimating

industrial demand was traditionally based on information provided in the Standard
Industrial classification Manual.

Buyer Intentions. The second approach is more focused and survey potential industrial.

Purchase intention –the likelihood customer will actually purchase a given product. The
company can send questionnaires to prospective customer to measure the intention
over a given forecast period.

II. FORECASTING APPROACHES AND TECHNIQUES

Managers can develop forecast with either (1) break-down approach or (2) the build-up
approach.

1. Breakdown Approach

The top-down steps in developing a sales forecast using the breakdown approach:

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 2. Build-Up Approach –based on the primary research, which is new data collected0 for
the specific purpose at hand. Research can either surveys individual salespeople about
what they expect to sell in the future time period, or surveys customers about their
purchase intention.

Classification of Sales Forecasting Approaches

1. Nonquantitative forecasting technique (subjective forecast) –they are based on

knowledgeable people’s opinions instead of being analytically derived.

Types of nonquantitative forecast:

1. Judgment Methods
a. Jury of executive opinion –asks key managers within the company
for their best estimate of sales in a given planning horizon and
combines the result to develop the forecast.

Some managers may support their opinion by facts, while the

others rely on intuition alone.

b. Sales force composite – ask the sales force for their best estimates
of sales in a planning horizon. Managers evaluate and adjust each
salesperson’s estimates before combining them to form an overall
forecast.

2. Counting Methods –forecasting methods that tabulate responses to

question on surveys or count the numbers of buyers or purchases.
a. Surveys of buying intentions –sample customers and ask about
their intentions to buy various product over a specified period.
Managers then combine the responses into one forecast, generally
by products, customers and territories.
b. Test Marketing - is an experiment conducted in a field
laboratory (the test market) comprising of actual stores and
real-life buying situations, without the buyers knowing they
are participating in an evaluation exercise.

2. Quantitative Forecasting Techniques –Based on historical information that is

usually available within the company.

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 Two Broad Categories of

1. Time Series Method

-used historical data to predict future sales.

Factors when using time-series methods:

a. Trends –upward and downward movements in a time series as

result of basic development in population, technology or capital
formation.
b. Periodic Movement –consistent pattern of sales changes in a
given period.
c. Cyclical movements –wave-like movements of sales that are
longer in duration than a year and often irregular occurrence.
d. Erractic movements –one-time specific events –that are not
predictable.

Three types of Times Series Methods:

1. Moving Average – predicts future sales as mathematical

function of sales in recent time periods.
2. Exponential Smoothing –it is a type of moving average that
represents the weighted sum of all past numbers in a time
series, with the heaviest weight place on the most recent year.
3. ARIMA (autoregressive integrated moving average) –
forecasting approach based on the moving average concept.

2. Casual/Association Method –attempts to identify the factors affecting sales

and to determine the nature of the relationship between them. Casual or
associative methods include correlation regression analysis, econometric analysis
and input-output model.

Criteria for selecting forecasting method:

1. Comprehensibility –sales managers must understand the basic methods
of developing forecast. This understanding provides confidence in the
estimates of different approaches.
2. Accuracy –must provide result that sufficiently accurate for the purpose
desired.
3. Timeless –must generate forecast in time for managers to use them.

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 4. Quality and Quantity of information –any forecasting method is limited
by the amount and quality of information available to the organization.
5. Qualified personnel –
6. Flexibility –managers continually monitor actual sales for any deviation
form forecast that may indicate the need for revised sales forecasting
tools.
7. Cost/Benefits –the benefits from forecasting must more than offset the
costs of generating the sales forecast.

SALES BUDGET PLANNING

Sales budget –is a financial sales plan outlining how to allocate resources and selling
effort to achieve the sales forecast.

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