A sales forecast is important for at least five reasons:

1. A sales forecast becomes a basis for setting and

maintaining a production schedule – manufacturing.
2. It determines the quantity and timing of needs for labor,
Sales Forecasting  equipment, tools, parts, and raw materials – purchasing,
personnel.
3. It influences the amount of borrowed capital needed to
finance the production and the necessary cash flow to
operate the business – controller.
by 4. It provides a basis for sales quota assignments to various
Anoop Kumar Gupta segments of the sales force – sales management.
5. It is the overall base that determines the company’s
MAIT business and marketing plans, which are further broken
down into specific goals – marketing officer.
1

FORECASTING MARKET DEMAND PLANNING/FORECASTING/BUDGETING SEQUENCE

1. When one is in a producer’s market there is less
of a need for forecasting as the market takes up
all one’s production; it is less a matter of selling
and more a matter of allowing customers to Marketing Plan
purchase.
2. However, in a buyer’s market, the consequence of
over-production is unsold stock which is costly to
finance from working capital borrowings.
Conversely, under-production can be detrimental Sales Forecasts Sales Force Budget
as sales opportunities might be missed due to
long delivery times and business might pass to a
competitor that can offer quicker delivery.
3. Thus the purpose of the sales forecast is to plan
ahead and go about achieving forecasted sales.

USES OF SALES FORECASTS THE FORECASTING PROCESS

The forecasting process refers to a series of
1. A sales forecast is the estimated rupees or unit procedures used to forecast.
sales for a specific future time period based on a
proposed marketing plan and an assumed The process starts with the determination of
market environment. forecast objective.
2. In addition, the sales forecasting procedure must
be taken seriously because from it stems
Forecast Objective may be an estimation of
business planning. If the forecast is flawed then 1. Rupees Sales
business plans will also be incorrect.
2. Unit Sales
3. Number of Salespeople,
to hire next year.

1
 Basic Steps in Breakdown Method of Forecasting Sales

A market factor is an item or element that

(1) exists in a market, (2) may be measured General Environment Forecast
quantitatively, and (3) is related to the Industry Sales Forecast
demand for a product or service. Company Sales Potential
Company Sales Forecast
Product Lines
Individual Products for
A market index is simply a market factor Customers-Territories-Regions-Divisions-U.S.A.-World
expressed as a percentage relative to some
base figure.

THE FORECASTING PROCESS

Industry sales forecast, or market potential,
Forecast Determine Dependent and Develop Forecast is the estimated sales for all sellers.
Objective Independent Variables Procedure

Select Forecast Company sales potential is the maximum

Analysis Method
Evaluate Results
estimated or potential sales the company
versus Forecast
Total Forecast
may reach in a defined time period under
Procedure given conditions.
Make and Finalize Present Assumptions Gather and Analyze
Forecast about Data Data The company’s share of the estimated sales
for an entire industry is referred to as
market share.

Categories of Forecasting Build-up Method

1. Breakdown 1. This method is reverse of

breakdown method.
2. Build-up
2. Individual forecasts are made by
groups and units with-in the firm
and then combined to make broader
forecasts.

2
 Executive Opinion
SALES FORECASTING
METHODS Executive forecasting is done in two ways:
Is the original sales forecasting method
Two categories of sales forecasting methods exist: and is still the most widely used,
• Survey methods are qualitative and include regardless of the company size.
executive opinion, sales force composite,
and customer’s intention surveys. 1. By one seasoned individual (usually
• Mathematical methods are test markets, in a small company).
market factors, naïve models, trend analysis,
and correlation analysis. 2. By a group of individuals, sometimes
called a “jury of executive
opinion.”

THE MORE POPULAR OF MANY FORECASTING METHODS

The group approach uses two methods:
Survey Methods Mathematical Methods

1. Key executives submit the independent

Executive User’s estimates without discussion, and these are
Opinion Expectation Test Market Regression
averaged into one forecast by the chief
Naive Trend executive.
Sales Force Build-to-
Composite Order
Moving Exponential
2. The group meets, each person presents
Average Smoothing separate estimates, differences are
resolved, and a consensus is reached.

SURVEY FORECASTING METHODS

Also known as Qualitative Methods.

Delphi Method
Four basic survey methods are
• Executive Opinion Administering a series of questionnaires
• Sales Force Composite to panels of experts.
• User’s Expectations
• Build-to-Order

3
 MATHEMATICAL FORECASTING
METHODS
Sales Force Composite

Obtaining the opinions of sales Test markets are a popular method of

personnel concerning future sales. measuring consumer acceptance of new
products.

User’s Expectations Time Series Projections

Consumer and industrial companies Time series methods use chronologically

often poll their actual or potential ordered raw data.
customers. Historical data are used to predict future
events.

Classical approach to time series analysis:

Build-to-Order
• The trend component.
Companies build final products only after • The seasonal component.
firm orders are placed.
• The cyclical component.
• The erratic component.

4
Naïve Method
Also known as ratio method Exponential Smoothing

Exponential smoothing is similar to the moving-

Next Year’s Sales = This Year’s Sales X This Year’s Sales
Last Year’s Sales
average forecasting method. It allows
consideration of all past data, but less weight is
placed on data as it ages.
It is weighted moving average method.
Next Year’s Sales = a (This Year’s Sales) + (1-a) (This Year’s Forecast)

Moving Average
Moving averages are used to allow for Trend Projections – Least Squares
marketplace factors changing at different
rates and at different times. Eyeball fitting is simply a plot of the data
With this method distant past and distant with a line drawn through them that the
future have little value in forecasting. forecaster feels most accurately fits the
linear trend of the data.

TABLE 5.1 EXAMPLE OF MOVING-AVERAGE FORECAST FIGURE 5.6 A TREND FORECAST OF SALES

SALES SALES FOR THREE-YEAR Observed Sales Forecast Sales

PERIOD VOLUME THREE-YEAR PERIOD MOVING AVERAGE
600
1 200
500
2 250
400 Trend
3 300 750
Line
300
4 350 900 300
Sales

5 450 1100 ( 3) = 366.6 200

6 ? 100
Period 6 Forecast = 366.6 0
1984 1985 1986 1987 1988 1989 1990
Time

5
 GUIDE TO FORECASTING

FORCASTING MATHEMATICAL COMPUTER

METHOD TIME SPAN SOPHISTICATION NEED ACCURACY
Executive Opinion Short to medium Minimal Not essential Limited

Delphi Method Medium to long Minimal Not essential Limited; good in dynamic
Regression Analysis conditions
Sales Force Composite Short to medium Minimal Not essential Accurate under dynamic conditions

User’s Expectations Short to medium Minimal Not essential Limited

Regression analysis is a statistical method used to Test Markets Medium Needed Needed Accurate
incorporate independent factors that are thought to Naïve Method Present to medium Minimal Not essential Limited
influence sales into the forecasting procedure. Moving Average Short to long Minimal Helpful Accurate under stable conditions

Exponential Smoothing Short to medium Minimal Helpful Accurate under stable conditions

Least Squares Short to long Needed Desirable Varies widely

Regression Analysis Short to Medium Needed Essential Accurate if variable relationships

stable

FIGURE 5.7 REGRESSION ANALYSIS

Linear Relationship Curvilinear Relationship

Sales

Sales

0 0
Population Population
(A) (B)

Questions to Answer to Improve Chances of Hitting the Forecasting Bull’s-Eye

ed
er
sid

et ur cy
c a le g t o n

M Yo ura
re Se sin cs Co

ld (s)
d?
ng ng cc
Fo nd rea asi ou

? ou st
ho
sti cti A

se h ca
a nc B Y

U S re
I he ve

u od Fo
t a
H

Yo eth ich

140%
M h
W

130%
120%
110%
F
Breakdown O
Have You Developed R
Use Multiple
a Good E
Market Decision Support System Forecasting
Sales Forecasting C
Methods
Process? A
Buildup
S
T 90%
Co our

Co nd

80%
a
ul ce
S

ul So

70%
d sH

d ftw
O e

th a

60%
ut lp

e re
Co H
si d ?

m el
e

p u p?
te
r