Sales Forecasting

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Table of Contents

Getting Started .............................................................................................................................................................. 3

Importance of Sales Forecasting ........................................................................................................................... 4

Objective ........................................................................................................................................................................... 5

Factors to Consider ...................................................................................................................................................... 6

Data Scope ....................................................................................................................................................................... 7

Procedure & Forecast Selection ......................................................................................................................... 10

Success Criteria ........................................................................................................................................................... 11

Applications.................................................................................................................................................................. 12

Uses ................................................................................................................................................................................... 13

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Getting Started
A sales forecast reports, graphs and analyzes the pulse of your business. It can make the
difference between just surviving and being highly successful in business. It is a vital cornerstone
of a company's budget. The future direction of the company may rest on the accuracy of your
sales forecasting.

For sales forecasting to be valuable to your business, it must not be treated as an isolated
exercise. Rather, it must be integrated into all facets of your organization.

Companies that implement accurate sales forecasting processes realize important benefits such
as:

 Enhanced cash flow

 Knowing when and how much to buy
 In-depth knowledge of customers and the products they order
 The ability to plan for production and capacity
 The ability to identify the pattern or trend of sales
 Determine the value of a business above the value of its current assets
 Ability to determine the expected return on investment (This can be very helpful if
the company is trying to obtain financing from investors or other lending
institutions)

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Importance of Sales Forecasting
Sales forecasting is a very important function for a manufacturing concern, since it is useful in
following ways:

 It helps to determine production volumes considering availability of facilities, like

equipment, capital, manpower, space etc.
 It forms a basis of sales budget, production budget natural budget etc.
 It helps in taking decision about the plant expansion and changes in production mix or
should it divert its resource for manufacturing other products.
 It helps in deciding policies.
 It facilitates in deciding the extent of advertising etc.
 The sales forecast is a commitment on the part of the sales department, and it must be
achieved during the given period.
 Sales forecast helps in preparing production and purchasing schedules.
 Accurate sales forecasting is a very good aid for the purpose of decision making.
 It helps in guiding marketing, production and other business activities for achieving
these targets.

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Objective
To set the sales target -

The primary purpose of sales forecasting is to establish sales performance goals for the
organization. To get the real and accurate picture of sales, forecasting should be first made for
small region and then for large territories.

To maintain inventory -

An accurate sales forecasting helps in estimating the amount of raw materials required for future
goals. It helps in keeping the inventory up for peak periods.

To regulate manpower requirement -

Appropriate manpower is required for continuous production. A good manpower policy is

needed to prevent the shortage of manpower.

To decide plant capacity –

Based on sales forecasting the organization can plan the plant with output of desired capacity.

To predict expenses –

It helps in predicting the expenses and planning budget. It is also useful in preparing credit
policy of the company. It is also required for uninterrupted supply of input resources.

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Factors to Consider
Competition:

To assess demand, it is the main factor to know about the existing and new competitors and
their future program, quality of their product, sales of their product. Opinion of the customers
about the products of other competitors with reference to the product manufactured by the
firm must also be considered.

Consumers:

Products like, wearing apparel, luxurious goods, furniture, vehicles; the size of population by its
composition-customers by age, sex, type, economic condition etc., have an important role. And
trend of fashions, religious habits, social group influences etc., also carry weights.

Changes in Technology:

With the advancement of technology, new products are com-ing in the market and the taste
and the likings of the consumer’s changes with the advancement and change of technology.

Changes within Firm:

Future sales are greatly affected by the changes in pricing, advertising policy, quality of products
etc. Sales can be increased by price cut, enhancing advertising policies, increased sales
promotions, concessions to customers etc.

Government Action:

When the government produces or purchases then depending upon the government policy and
rules, the sales of the products are also affected.

Factors Related to the Concern Itself:

These factors are related to the change in the capacity of the plant, change in price due to the
change in expenditure, change in product mix etc.

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Data Scope
Since the forecast is based on your company's previous sales, it is necessary to know the dollar
sales volume for the past several years. To complete a thorough sales forecast, you also need to
take into consideration all the data, that can affect sales.

Mathematically, it is possible to forecast sales with some precision. Realistically, however, this
precision can be dulled because of external market and economic factors that are beyond your
control. The following are some of the external data need to forecast sales includes:

 Seasonality of the business

 Relative state of the economy
 Direct and indirect competition
 Political events • Styles or fashions
 Consumer earnings
 Population changes
 Weather
 Productivity changes

The following internal data will be scrutinized and analyzed when conducting a sales forecast.
Therefore, this data must be prepared on a consistent basis:

 Accounting records
 Financial statements
 Sales-call reports
 After-sales service demands from clients

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Assumptions & Approach
Assumptions:

 Forecast must be made in terms of rupees of sale volume or in units.

 Forecast must be made on annual basis and then further divided as requirement, i.e. by
month-wise, week-wise, or so based on previous year’s records.
 Forecast for new product by month-wise, may be done either using other
manufactur­ing concern’s data or by survey.
 Forecast must be made in terms of product groups and broken for individual products,
the division may be according to the sizes, brands, cables, colors etc. A typical example
shows how the product group is divided.

Approach:

 Quantitative
o Estimating a, indefinite or considerable amount of anything.

If demand for your product is highly stable and predictable, the forecast consists of past
sales and inflation to predict future sales. In formula form, it is simply:

Past Sales + Percentage of Inflation Factor = Sales Forecast Monthly Forecasts

 Quantitative
Rely primarily on numbers to conclude forecasts, these are calculated from
important numbers such as sales volume, gross national product, disposable
income, and total number of buyers in the market. These numbers have been
shown to have significant value in forecasting.

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Types of Sales Forecasting
Short-Term Forecasting:

This type of forecasting can be defined when it covers a period of three months, six months or
one year. Generally, the last one is most preferred. The period is dependent upon the nature of
business. If the demand fluctuates from one month to another, forecasting may be done only for
a short period.

Purpose of Short-Term Forecasting:

 To adopt suitable production policy so that the problem of overproduction and short
supply of raw material, machines etc. can be avoided.
 To reduce the cost of raw materials, machinery etc.
 To have proper control of inventory.
 To set the sales targets.
 To have proper controls.
 To arrange the financial requirements in advance to meet the demand.

Long-Term Forecasting:

The forecasting that covers a period of 5, 10 and even 20 years. The period here also de-pends
upon the nature of business, but beyond 12 years, the future is assumed as uncertain. But in
many industries like shipbuilding, petroleum refinery, paper making industries, a long-term
forecasting is needed as the total investment cost of equipment is quite high.

Purpose of Long-Term Forecasting:

 To plan for the new unit of production or expansion of existing unit to meet the demand.
 To plan the long-term financial requirements.
 To train the personnel so that man-power requirement can be met in future.

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Procedure & Forecast Selection
Procedure:

 State whether the forecasting is short-term or long term, its objectives, only for a single
undertaking or for whole industry.
 Select a good method of forecasting.
 Select different variables which are affecting the forecasting.
 Gather data for different variables.
 Determine best possible relationship by some statistical method between different
variables.
 Make forecast and interpret the result.

Forecast Selection:

 Prefer those forecasts which have reasoning’s underlying forecast.

 Prefer those forecasts which are prepared by qualified personnel, as the future is
uncertain, he must tell his assumptions on which forecast is based.
 Look into the previous year’s forecasts, surveys should be examined as to why the
forecasts are right or wrong.
 Use only those forecasts which are reliable. Prefer only those of the forecasts which are
prepared using different techniques.
 Reject that forecast in which forecaster injected himself too strongly as an individual into
his forecast.

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Success Criteria
Accuracy:

Implies that a forecast should be made close to real figures, so that the real picture of demand
can be determined.

Durability:

Implies that forecasts should be done in such a way that they can be used for long periods as
forecasts involves a lot of time, money, and efforts.

Flexibility:

Implies that the forecasts should be adjustable and adaptable to changes. An organization, while
making forecasts, should consider various business risks that may take place in the future.

Acceptability:

Refers to one of the most important criterion of demand forecasting. An organization should
forecast its demand by using simple and easy methods. In addition, the methods should be such
that organizations do not face any complexities.

Availability:

Implies that adequate and up-to-date data should be available for forecasts. The forecasts
should be done in timely manner so that necessary arrangements should be made related to the
market demand.

Plausibility:

Implies that the demand forecasts should be reasonable, so that they are easily understood by
individuals who are using it.

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Applications
Product Planning:
From forecasts we find out which product is more profitable, and which should be
manufactured, and which should be dropped.

Planning Expansions:
Long range forecasts can predict future demand trends, which will enable the planning for
expansion of the concern.

Financial Planning:
Sales forecast permits an evaluation of expenses and income etc.

Inventory Control
It facilitates better planning and control over the inventories.

Production Control
It will help in better production control, i.e. better use of equipment’s, controls over-time of
labor, better deliveries, better control over work-in-progress inventories.

Sales Planning
It helps in finding out which territory needs more attention. Various sales programme can be
reassessed looking to their achievements.

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Uses
Sales forecast can be used for following purposes:
 Helps the management to decide marketing strategies.
 Helps in preparing the budget and for setting financial policies.
 With reliable sales forecast it is possible to produce at an average rate so that plant
capacity and manpower is fully utilized during the entire period. Thus, the forecasting
enables to overcome seasonal variations.
 Helps in material planning and avoids the evils of both the over-stocking and under
stocking.
 From forecasts we can find out which product is more profitable, and which should be
manufactured, and which should be dropped.
 Long range forecasts can predict future demand trends, which will enable the planning
for expansion of the concern.
 Helps in finding out which territory needs more attention. Various sales programmes can
be reassessed looking to their achievements.

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