Table of Contents
Sales forecasting is the process of predicting future sales. Every manufacturer estimates the sales that are expected to occur in the near future.
It concentrates the activity of a corporate firm. In the lack of a sales forecast, a company must operate on a haphazard basis.
Meaning
A businessman who has put a significant amount of money into his venture cannot afford to operate recklessly.
His manufacturing and sales efforts must be planned. Forecasting enables a company to function according to a set of guidelines, i.e., methodically.
Importance of Sales Forecasting
1. Sales forecasting allows a company to function in a methodical manner.
2. Forecasting allows a production manager to set goals for his employees.
3. It allows the sales department to assign roles and tasks to each salesperson.
4. In the lack of a sales forecast, a company firm may operate without focus, resulting in resource waste.
5. It aids in the reduction of needless expenditure, allowing items to be sold at a reasonable price.
6. A sales forecast helps all of the company’s departments to collaborate and coordinate effectively.
7. Controlling performance is simple because targets are specified for each individual and department.
8. Sales forecasting is essential for budgeting.
9. It aids in determining the real manufacturing capacity necessary.
10. Product mix selections are aided by sales forecasts. It allows the company to determine whether to add a new product to its portfolio or to discontinue a failed one.
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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. Executive Opinion Jury
This is the oldest technique of sales forecasting. The predicted sales are determined by one or more of the executives who are seasoned and knowledgeable about market dynamics.
The executives are in charge of estimating sales statistics based on forecasts and previous experiences. All factors, both internal and external, are considered. This is a committee-style method.
This approach is straightforward since it combines experience and judgment to arrive at a sales projection figure. When there are a lot of executives, the sales prediction is made by averaging their estimations.
Merits
(a) It is a simple and quick procedure.
(c) No detailed information is required.
(c) There is a sense of economy.
Demerits
(a) It isn’t based on factual information.
(b) Making a final decision is challenging.
(c) The process is mostly based on guesswork, which may result in inaccurate projections.
(d) Breaking down projections into goods, markets, and other categories is tough.
2. Sales Force Opinion
Salesmen or intermediates are expected to estimate sales in their respective regions for a certain period under this approach.
Salespeople are in constant contact with customers and have an excellent understanding of future demand trends.
As a result, all sales force estimates are processed, merged, and adjusted, and a sales volume estimate for the whole market for the specified period is created.
Merits
(a) Expert knowledge is applied.
(b) Salespeople are confident in their ability to reach their quotas.
(c) This strategy makes it easier to split things down into categories like items, territory, customers, and salespeople.
Demerits
(a) The ability of salespeople is critical to success.
(a) There is no broad view.
(c) Due to the salesmen’s optimism or pessimism, the estimation may be unreachable or too low for the projections.
3. Marketing Test Results
In the market test approach, items are presented in a small geographic region and the results are analysed. S
ales forecasts are built using this outcome as a starting point. This test is run as a sample on a pre-test basis to better evaluate market reaction.
Merits
(a) The system is trustworthy since the forecast is based on actual data.
(b) Management can see flaws and take corrective action.
(c) It’s useful for launching new items, expanding into new markets, and so on.
Demerits
(a) Markets are not all created equal. However, the research is based on a segment of the market.
(b) It is a lengthy procedure.
(c) It is expensive.
4. Consumer Buying Plan
Consumers are contacted as a source of information to learn about their expected purchases within a specific time period under certain conditions.
When there are few consumers, this strategy is appropriate. For industrial items, this sort of forecasting is commonly used.
It is appropriate for sectors that manufacture expensive items for a small number of purchasers, such as wholesalers, retailers, and potential consumers.
A face-to-face survey or survey method is used to perform a survey.
It’s because things change all the time, yet customer behaviour and purchasing decisions do not.
Merits
(a) It is feasible to obtain firsthand knowledge.
(b) The user’s purpose is understood.
Demerits
(a) The customer’s expectation cannot be precisely assessed.
(b) It’s tough to track down genuine customers.
(c) It’s OK when there are a few users, but it’s impractical when there are a lot of them.
(d) Long-term forecasting is impossible to do.
f) The system is expensive.
(f) Purchasers have the option to modify their minds.
5. Market Factor Analysis
The performance of various market elements might influence a company’s sales. It is possible to discover the main elements that influence sales.
Forecasting should be done by examining the behaviours of the components. Correlation is a statistical study that examines the degree to which two variables vary in relation to one another.
The term’relationship’ is significant since it implies that the variables under investigation are linked in some way.
Regression analysis, on the other hand, is a statistical tool that allows us to estimate or forecast unknown values of one variable based on known values of another variable.
For example, you may produce a text book on “Banking” that is associated with many colleges. Each student’s maximum intake capacity and the medium in which they are taught are known. Is it a required or elective subject?
You may be able to declare the likely copies to be printed by gathering all of these facts and taking into account the sales activities of promotional activity.
The identification of acceptable market parameters is crucial to the effective application of this strategy. It’s also crucial to keep the number of market components to a minimum.
Price, competition, advertising, disposal income, buying habits, consuming habits, consumer price index, demographic change, and other factors must all be considered by demand decision makers.
Merits
(a) It is a reliable procedure.
(a) The market factor is thoroughly examined.
Demerits
(a) It is expensive.
(b) It takes a long time.
(c) It’s a quick procedure.
6. Expert Opinion
A variety of consulting firms have branched out into the field of sales.
The consultation firm employs subject-matter specialists in the relevant discipline. Dealers, trade groups, and other organisations fall within this category.
They could be able to do market research and have ready-to-use statistical data. The opinions of such specialists may be used by businesses.
The organisation may thoroughly examine these viewpoints and make a reasonable forecast based on them.
Merits
(a) Forecasting is rapid and low-cost.
(b) It’ll be more precise.
(c) The use of specialised knowledge is made.
Demerits
(a) It may not be trustworthy.
(b) Forecasting success is contingent on the expertise of experts.
(c) A wide perspective can be inadequate.
7. Developing Econometric Models
This is a mathematical method of research that is a great technique to predict sales. This strategy is better suited to the marketing of long-lasting items.
It is presented in the form of equations, which depict a set of correlations between various demand-determinating market elements.
Sales are forecasted by studying market variables (independent variable) and sales (dependent variable).
This approach isn’t completely reliant on correlation analysis.It has a lot of potential, but it can only be used if all of the necessary information is available.
For solid forecasting, market elements that are more accurate, rapid, and less expensive might be chosen.
8. Sales in the Past (Historical Method)
The use of statistical and quantitative tools can help augment personal judgement in sales forecasting. Past sales provide a solid foundation upon which future sales may be calculated and forecasted.
According to Kirkpatrick, today’s sales activities flow into tomorrow’s sales activities; in other words, last year’s sales are carried over into this year’s sales.
This method involves adding or subtracting a percentage from the previous year’s sales (s). This strategy is ineffective for new industries and goods.
(a) Simple Sales Percentage: Sales forecasts are created using this approach by simply adding a flat percentage of sales to anticipated sales as shown below:
(b) Time Series Analysis: Time series analysis is a statistical technique for examining historical data. Long-term trends, cyclical shifts, seasonal variations, and irregular fluctuations are all isolated.
Past sales statistics are used as a starting point, then analysed and updated to account for future patterns. We can analyse the data and estimate future patterns and trade cycles using historical data and reports.
Merits
(a) There is no guesswork involved.
(b) The procedure is straightforward and low-cost.
(c) This is an approach that is objective.
Demerits
(a) ‘Market is dynamic’ is not taken into account.
(a) There is no provision for sales activity upswings and downswings.
9. Statistical Procedures
Statistical approaches are seen to be superior tools for sales forecasting since they are more reliable than other methods.
The methods are as follows: (i) Trend Method (ii) Graphical Method (iii) Time-Series Method:
(a) The freehand technique
(b) The semi-average method
(c) The moving average method
(d) The least square method
(iv) The correlation method
Merits
1. It is a factual prediction.
2. It does not require any guesswork.
3. It’s easy to use.
Demerits
1. It overlooks market circumstances.
2. It does not account for the possibility of unforeseen events.
Criteria of a good forecasting method
1. Believability
The management should have a thorough grasp of the approach chosen and be confident in its application. Only then will an appropriate interpretation be established.
The plausibility requirements, according to Joel Dean, can frequently improve the correctness of the outcome.
Accuracy necessitates the executives’ acceptance of the outcomes. Experienced executives will have a good sense of the market and will be able to participate successfully.
2. Conciseness
The approach adopted should be basic enough for the executives to understand.
If the management does not comprehend what the forecaster is doing, complex mathematical and econometric processes are less acceptable.
3. Economic situation
 Cost is a major factor to consider, but it should be balanced against the relevance of predictions to the organisation.
It’s pointless to spend a lot of money to achieve high levels of accuracy if the prediction isn’t important to the company.
4. Accessibility
The instantaneous availability of data is a must in any forecasting process.
The method should produce a speedy and useful outcome. A delay in the outcome will have a negative impact on the managerial choice.
Limitations of Sales Forecast
1. The tastes and preferences of purchasers change throughout time. The projections might be rendered worthless if the purchasers’ preferences alter abruptly.
2. The economic conditions in any country are likewise not steady. Money’s purchasing power, desire to save and invest, and so on,are some of the key economic elements that influence sales forecasts.
3. A state’s political situation has an impact on sales forecasting. The government’s policies on business change often. The government’s unexpected increase in excise duty or sales tax may have an impact on sales.
4. The arrival of rivals may have an impact on sales. If customers find rivals’ products to be superior, a dominant corporation may lose its monopoly status.
5. Scientific and technological advancements may render current technologies outdated. As a consequence, items that are now popular may lose popularity, while demand for products manufactured using cutting-edge technology would rise.
This is especially true in the market for electronic products, computer hardware, software, and other such items.
Other Related Topics
- Sales Presentation
- Sales Forecasting
- Sales Quota
- Sales Management
- Sales Territories
- Salesman – Types & Functions
- Buying Motives – Types & Stages
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