Sales Forecasting?(SALES MANAGEMENT)

Sales Forecasting

 

Sales Forecasting: Meaning, Factors, Importance and Limitations!

Meaning

Future is uncertain. Man thinks about future. He may be a businessman, a broker, a manufacturer, a commission agent etc. All guess about the future in their respective field of interest. We try to know, through a clear imagination, what will be happening in the near future—after a weak, month or year. It can be called forecast or prediction. The process of forecasting is based on reliable data of past and present. Forecasting is not new, as it has been practiced from time immemorial.
Forecasting is one of the important aspects of administration. The comer-stone of successful marketing planning is the measurement and forecasting to market demand. According to American Marketing Association, “Sales forecast is an estimate of Sales, in monetary or physical units, for a specified future period under a proposed business plan or programme and under an assumed set of economic and other forces outside the unit for which the forecast is made.”
A sales forecast is an estimation of sales volume that a company can expect to attain within the plan period. A sales forecast is not just a sales predicting. It is the act of matching opportunities with the marketing efforts. Sales forecasting is the determination of a firm’s share in the market under a specified future. Thus sales forecasting shows the probable volume of sales.
“Sales forecast is an estimate of sales during a specified future period, whose estimate is tied to a proposed marketing plan and which assumes a particular state of uncontrollable and competitive forces.” —Candiff and Still

Factors influencing a Sales Forecasting:

A sales manager should consider all the factors affecting the sales, while predicting the firm’s sales in the market.

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An accurate sales forecast can be made, if the following factors are considered carefully:
1. General Economic Condition:
It is essential to consider all economic conditions relating to the firm and the consumers. The forecaster must see the general economic trend-inflation or deflation, which affect the business favourably or adversely. A thorough knowledge of the economic, political and the general trend of the business facilitate to build a forecast more accurately. Past behaviour of market, national income, disposable personal income, consuming habits of the customers etc., affect the estimation to a great extent.

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2. 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.
3. Industrial Behaviours:
Markets are full of similar products manufactured by different firms, which compete among themselves to increase the sales. As such, the pricing policy, design, advanced technological improvements, promotional activities etc., of similar industries must be carefully observed. A new firm may come up with products to the markets and naturally affect the market share of the existing firms. Unstable conditions—industrial unrest, government control through rules and regulations, improper availability of raw materials etc., directly affect the production, sales and profits.

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4. Changes within Firm:
Future sales are greatly affected by the changes in pricing, advertising policy, quality of products etc. A careful study in relation to the changes on the sales volume may be studied carefully. Sales can be increased by price cut, enhancing advertising policies, increased sales promotions, concessions to customers etc.
5. Period:
The required information must be collected on the basis of period—short run, medium run or long run forecasts.

Importance of Sales Forecasting:

1. Supply and demand for the products can easily be adjusted, by overcoming temporary demand, in the light of the anticipated estimate; and regular supply is facilitated.

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2. A good inventory control is advantageously benefited by avoiding the weakness of under stocking and overstocking.
3. Allocation and reallocation of sales territories are facilitated.
4. It is a forward planner as all other requirements of raw materials, labour, plant layout, financial needs, warehousing, transport facility etc., depend in accordance with the sales volume expected in advance.
5. Sales opportunities are searched out on the basis of forecast; mid thus discovery of selling success is made.
6. It is a gear, by which all other activities are controlled as a basis of forecasting.
7. Advertisement programmes are beneficially adjusted with full advantage to the firm.
8. It is an indicator to the department of finance as to how much and when finance is needed; and it helps to overcome difficult situations.
9. It is a measuring rod by which the efficiency of the sales personnel or the sales department, as a whole, can be measured.
10. Sales personnel and sales quotas are also regularized-increasing or decreasing-by knowing the sales volume, in advance.
11. It regularizes productions through the vision of sales forecast and avoids overtime at high premium rates. It also reduces idle time in manufacturing.
12. As is the sales forecast, so is the progress of the firm. The master plan or budget of a firm is based on forecasts. “The act of forecasting is of great benefit to all who take part in the process, and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a unified front, an understanding of the reasons for decisions, and a broadened outlook.”

Types of Sales Forecasting:

The Economic Forecast:
This type of forecast is important to understand the general economic trend through a careful study of Five Year Plans, Gross national products. National income, Government expenditure, Unemployment, Consumer spending habits etc. This is in order to have an accurate forecast. Big companies, in India, adopt this method.
The Industry Forecast:
The future market demand is calculated through industrial forecast or market forecast. The expected sales forecasts of all the industries, in the same line of business are combined. Market demand may be affected by controllable-price, distribution, promotion, etc., and uncontrollable-demographic, economic, political, technological development, cultural activities etc. The executive must take into account all these conditions while forecasting.
The Company Forecast:
The third step goes to the firm concerned to look into the market share, for which forecast is to be made. By considering both controllable and uncontrollable, based on chosen marketing plans within the firm, with that of other industries, steps are taken in formulating forecasts.
There are three classes of sales forecasts:
1. Short-run Forecast:
It is also known as operating forecast, covering a maximum of one year or it may be half-yearly, quarterly, monthly and even weekly. This type of forecasting can be advantageously utilized for estimating stock requirements, providing working capital, establishing sales quotas, fast moving factors. It facilitates the management to improve and co-ordinate the policies and practice of marketing-production, inventory, purchasing, financing etc. Short-run forecast is preferred to all types and brings more benefits than other types.
2. Medium-run Forecast:
This type of forecast may cover from more than one year to two or four years. This helps the management to estimate probable profit and control over budgets, expenditure, production etc. Factors-price trend, tax policies, institutional credit etc., are specially considered for a good forecast.
3. Long-run Forecast:
This type of forecast may cover one year to five years, depending on the nature of the firm. Seasonal changes are not considered. The forecaster takes into account the population changes, competition changes, economic depression or boom, inventions etc. This type is good for adding new products and dropping old ones.

Limitations of Sales Forecast:

In certain cases forecast may become inaccurate. The failure may be due to the following factors:
1. Fashion:
Changes are throughout. Present style may change any time. It is difficult to say as to when a new fashion will be adopted by the consumers and how long it will be accepted by the buyers. If our product is similar to the fashion and is popular, we are able to have the best result; and if our products are not in accordance with the fashion, then sales will be affected.
2. Lack of Sales History:
A sales history or past records are essential for a sound forecast plan. If the past data are not available, then forecast is made on guess-work, without a base. Mainly a new product has no sales history and forecast made on guess may be a failure.
3. Psychological Factors:
Consumers’ attitude may change at any time. The forecaster may not be able to predict exactly the behaviour of consumers. Certain market environments are quick in action. Even rumours can affect market variables. For instance, when we use a particular brand of soap, it may generate itching feeling on a few people and if the news spread among the public, sales will be seriously affected.
4. Other Reasons:
It is possible that the growth may not remain uniform. It may decline or be stationary. The economic condition of a country may not be favourable to the business activities-policies of the government, imposition of controls etc. It may affect the sales.
The methods of forecasting discussed above have respective merits and demerits. No single method may be suitable. Therefore, a combination method is suitable and may give a good result. The forecaster must be cautious while drawing decisions on sales forecast. Periodical review and revision of sales forecast may be done, in the light of performance. A method which is quick, less costly and more accurate may be adopted.
The following are the various methods of sales forecasting:
1. Jury of Executive Opinion.
2. Sales Force Opinion.
3. Test Marketing Result.
4. Consumer’s Buying Plan.
5. Market Factor Analysis.
6. Expert Opinion.
7. Econometric Model Building.
8. Past Sales (Historical Method).
9. Statistical Methods.

1. Jury of Executive Opinion:

This method of sales forecasting is the oldest. One or more of the executives, who are experienced and have good knowledge of the market factors make out the expected sales. The executives are responsible while forecasting sales figures through estimates and experiences. All the factors-internal and external—are taken into account. This is a type of committee approach. This method is simple as experiences and judgement are pooled together in taking a sales forecast figure. If there are many executives, their estimates are averaged in drawing the sales forecast.
Merits:

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(a) This method is simple and quick.
(b) Detailed data are not needed.
(c) There is economy.
Demerits:

(a) It is not based on factual data.
(b) It is difficult to draw a final decision.
(c) More or less, the method rests on guess-work, and may lead to wrong forecasts.
(d) It is difficult to break down the forecasts into products, markets, etc.

2. Sales Force Opinion:

Under this method, salesmen, or intermediaries are required to make out an estimate sales in their respective territories for a given period. Salesmen are in close touch with the consumers and possess good knowledge about the future demand trend. Thus all the sales force estimates are processed, integrated, modified, and a sales volume estimate formed for the whole market, for the given period.
Merits:
(a) Specialized knowledge is utilized.
(b) Salesmen are confident and responsible to meet the quota fixed.
(c) This method facilitates to break down in terms of products, territories, customers, salesmen etc.
Demerits:
(a) Success depends upon the competency of salesmen.
(b) A broad outlook is absent.
(c) The estimation may be unattainable or may to too low for the forecasts as the salesmen may be optimistic or pessimistic.

3. Test Marketing Result:

Under the market test method, products are introduced in a limited geographical area and the result is studied. Taking this result as a base, sales forecast is made. This test is conducted as a sample on pre-test basis in order to understand the market response.
Merits:
(a) The system is reliable as forecast is based on actual result.
(b) Management can understand the defects and take steps to rectify.
(c) It is good for introducing new products, in a new territory etc.
Demerits:
(a) All the markets are not homogeneous. But study is made on the basis of a part of a market.
(b) It is a time-consuming process.
(c) It is costly.

4. Consumers’ Buying Plan:

Consumers, as a source of information, are approached to know their likely purchases during the period under a given set of conditions. This method is suitable when there are few customers. This type of forecasting is generally adopted for industrial goods. It is suitable for industries, which produce costly goods to a limited number of buyers- wholesalers, retailers, potential consumers etc. A survey is conducted on face to face basis or survey method. It is because changes are constant while buyer behaviour and buying decisions change frequently.
Merits:
(a) First hand information is possible.
(b) User’s intention is known.
Demerits:
(a) Customer’s expectation cannot be measured exactly.
(b) It is difficult to identify actual buyers.
(c) It is good when users are few, but not practicable when consumers are many.
(d) Long run forecasting is not possible.
(e) The system is costly.
(f) Buyers may change their buying decisions.

5. Market Factor Analysis:

A company’s sales may depend on the behaviour of certain market factors. The principal factors which affect the sales may be determined. By studying the behaviours of the factors, forecasting should be made. Correlation is the statistical analysis which analyses the degree of extent to which two variables fluctuate with reference to each other.
The word ‘relationship’ is of importance and indicates that there is some connection between the variables under observation. In the same way, regression analysis is a statistical device, which helps us to estimate or predict the unknown values of one variable from the known values of another variable.
For instance, you publish a text book on “Banking”, affiliated to different universities. The permitted intake capacity of each and the medium through which the students are taught are known. Is it a compulsory or an optional subject? By getting all these details and also by considering the sales activities of promotional work, you may be able to declare the probable copies to be printed.
The key to the successful use of this method lies in the selection of the appropriate market factors. Minimizing the number of market factors is also important. Thus the demand decision makers have to consider price, competitions, advertising, disposal income, buying habits, consumption habits, consumer price index, change in population etc.
Merits:
(a) It is a sound method.
(b) Market factor is analysed in detail.
Demerits:
(a) It is costly.
(b) It is time-consuming.
(c) It is a short run process.

6. Expert Opinion:

Many types of consultancy agencies have entered into the field of sales. The consultancy agency has specialized experts in the respective field. This includes dealers, trade associations etc. They may conduct market researches and possess ready-made statistical data. Firms may make use of the opinions of such experts. These opinions may be carefully analysed by the company and a sound forecasting is made.
Merits:
(a) Forecasting is quick and inexpensive.
(b) It will be more accurate.
(c) Specialized knowledge is utilized.
Demerits:
(a) It may not be reliable.
(b) The success of forecasting depends upon the competency of experts.
(c) A broad outlook may be lacking.

7. Econometric Model Building:

This is a mathematical approach of study and is an ideal way to forecast sales. This method is more useful for marketing durable goods. It is in the form of equations, which represent a set of relationships among different demand determining market factors. By analyzing the market factors (independent variable) and sales (dependent variable), sales are forecast. This system does not entirely depend upon correlation analysis. It has great scope, but adoption of this method depends upon availability of complete information. The market factors which are more accurate, quick and less costly may be selected for a sound forecasting.

8. Past Sales (Historical method):

Personal judgement of sales forecasting can be beneficially supplemented by the use of statistical and quantitative methods. Past sales are a good basis and on this basis future sales can be formulated and forecast. According to Kirkpatrick, today’s sales activity flows into tomorrow’s sales activities; that is last year’s sales extend into this year’s sales. This approach is adding or deducting a set of percentage to the sales of previous year(s). For new industries and for new products, this method is not suitable.
(a) Simple Sales Percentage:
Under this method, sales forecast is made by adding simply a flat percentage of sales so as to forecast sales as given below:
Next year sales = Present year sales + This year sales/Last year sales
or = Present year sales + 10 or 5% of present sale
(b) Time Series Analysis:
A time series analysis is a statistical method of studying historical data. It involves the isolation of long time trend, cyclical changes, seasonal variations and irregular fluctuations. Past sales figures are taken as a base, analysed and adjusted to future trends. The past records and reports enable us to interpret the information and forecast future trends and trade cycle too.
Merits:
(a) No guess-work creeps in.
(b) The method is simple and inexpensive.
(c) This is an objective method.
Demerits:
(a) ‘Market is dynamic’ is not considered.
(b) No provision is made for upswings and downswings in sales activities.

9. Statistical Methods:

Statistical methods are considered to be superior techniques of sales forecasting, because their reliability is higher than that of other techniques.
They are:
(i) Trend Method
(ii) Graphical Method
(iii) Time-series Method:
(a) Freehand method
(b) Semi-average method
(c) Moving average method
(d) Method of least square
(iv) Correlation method
(v) Regression method.
NB:
The above statistical methods can easily be studies with the help of any statistics book.
Apart from the above, the following factors may also be considered:
1. Availability of raw materials
2. Plant capacity
3. Government policies
4. Buying habits of consumers
5. Fashion changes
6. Distribution system
7. Financial capacity
8. Market competition
9. National income movement
10. Sales promotions.

5 Essential Sales Forecasting Techniques

1. Opportunity stages forecasting

The most basic approach for calculating the chances of a deal closing are to look at where it is in the pipeline. Most businesses can break their pipeline down into a general set of stages: prospecting, qualified, quote, closing, and ending at won or lost. The farther along this chain of stages a deal gets, the better it’s chances of making it all the way to won.

To adopt this forecasting technique, you’ll need to analyze and understand your sales team’s past performance. It requires extrapolating, so a solid grounding on the rates of success from each stage is necessary to get a good estimate on future results. If about half of your deals that reach the quote stage end up as won, then you know you’ve got a fifty-fifty shot for all the deals in that stage during a given quarter.

Although it does make a numbers-based prediction, forecasting based on opportunity stages is an imperfect calculation. It can’t account for the individual characteristics of a given deal, say a repeat client versus a new one. It also requires that the deal value and close date are accurate in your CRM. Without that first step, your predictions will never be on point.

2. Length of sales cycle

Forecasting by the length of your sales cycle is another numbers-centric approach. Rather than analyzing success rates based on stage, this approach makes assessments based on age of the deal. It requires your team to crunch how long your average sales cycle is.

Since it’s not tied to strictly defined categories, using the length of sales cycle approach can open up the option for creating algorithms based on different types of deals. So you could have a separate set of numbers for the average repeat customer, or the average lead who comes from a website query.

Like the opportunity stages approach, this method still requires that accurate data finds its way into your CRM. Especially if you have multiple equations in the works, you’ll need to make sure that deals are being tagged and categorized correctly so that the math gives you a reliable prediction.

3. Regression analysis

One of the most mathematically-focused choices for forecasting is regression analysis. Success with this method requires a good grasp on statistics as well as on the factors influencing your company’s sales performance. It involves calculating the relationships between variables that impact sales. This could be sales calls, or inquiries received, or demo meetings held.

While this approach can yield very accurate forecasts, for some companies, being able to account for many variables that go into a successful sale may require a PhD in mathematics.

4. Forecast stages

This approach relies on the insights and intuition of the sales reps rather than on a deal moving through pre-determined stages. With forecast stages, reps make a personal projection about the outcome of any given sales opportunity. For instance, they may be certain that a customer is ready and willing to make a purchase, or the opportunity may need several things to come together for success.

The exact terminology may vary from one business to another, but the key here is that the reps are making a judgement call on how likely each of their deals are to close. When this information comes at the beginning of a deal’s lifespan, it can help managers and execs to get a long-range view of results. The sooner they have that intel, the better their financial predictions will be.

The downside to this approach is that it’s not a hard science. It requires that your whole team of reps is able to make honest assessments of their potential clients and their own skills. If you don’t have confidence in your reps, then this approach will lead to lots of disappointment for your business.

5. Scenario writing

Our final technique is also dependent on a subjective understanding of business and sales. In this approach, the forecaster projects likely outcomes based on a specific set of assumptions. He or she will draft several different pictures that could unfold based on the different sets of assumptions, say best- and worst-case scenarios for the deals in progress.

As with forecast stages, this strategy involves at least one person having a keen eye for both business activity and psychology. Both of these subjective strategies are more an art than a strict science, so they’re best used as a complement to a more numbers-driven method. Combining the strengths of both approaches will be more likely to create a full picture of what the future holds for your company.