Sales Forecasting

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Learning Goals

Understand the importance of sales forecasting to the firm Differentiate among market potential, sales potential, sales forecast, sales quotas and sales budget Explain the concept of market & sales potentials Discuss economic, industry, company & product forecast Outline various qualitative & quantitative methods of sales forecasting Discuss who is responsible for sales forecasting Understand how to evaluate sales forecast effectiveness

Definitions
Forecast
The amount of sales expected to be achieved under a set
of conditions within a specified future period.

Estimate of company sales for a specified future period

Sales forecasting is the most important planning task within any company large or small

Sales Forecasting

Importance
Forecasting of sales provides the starting point of assumptions used in various planning activities and for the development of short term financial control system All functional areas of an organization have a planning task, and all their projections and future estimates depend upon the sales forecast.
(Production, HR, Finance)

Sales Forecasting
Two of the most vital managerial uses of sales forecast are, 1. Setting of sales quotas Sales goals and objectives sought by the management Performance standards for the sales force
(Actual verses assigned quotas)

Consequently, establishment of realistic sales quotas is one of the most critical tasks, faced by a sales manager 2. Developing of sales budgets Management plan for expenditures to accomplish sales goals
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Sales Forecasting
Concepts
A good company would be concerned with several types Of sales estimates
How much product A could possibly be sold during next six months How about product B & C Company would like to be able to determine what its market share would be Situation suggests that there are 3 levels of concerns in sales forecasting
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Sales Forecasting

1.Market Potential 2.Sales Potential 3.Market Share

Sales Forecasting
Market Potential
Highest possible expected industry sales of a good or service in a market for a given time period.

Detergents (Total Market)

Million

$800

Sales Forecasting
Sales Potential
A firms share of the market potential

$ 320 Million

$ 480 Million

P&G

Lever Bros

Sales Forecasting
Market share
Percentage of a market controlled by a company or product

40 %

60 %

P&G

Lever Bros
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Sales Forecasting

Market Potential Estimated sales of total detergents, next year

in Pakistan

Sales Potential

P&Gs expected sales of detergents for the same period in Pakistan

Unilevers actual sales estimates based on potential and marketing plans Quota for shell is 5 million gallons in 2010

Sales Forecast Sales Quota

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Information Sources
Estimating Market & Sales Potential
Secondary sales data
Market Share Competition Market growth trend Judgment Potential Estimates

Past sales trends

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Sales Forecasting
Estimating Market & Sales Potential

Ability to buy - Buyers financial resources Willingness to buy - Buyers attitude to buy Test Marketing - Forecasting approach that measures sales in selected area, then project the results onto a broader area The product life cycle Sales planning & control tool that projects the changes in a products sales & profits over the time

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Information Sources
Census of Population - extensive demographic information, individuals, households, average family size Census of Business - wholesale, retail & service industries

Census of Manufacturing
- can be used to estimate market potential for many industrial products

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Information Sources

Private company data sources Press Internet Sales & Marketing Managements survey of buying power Government sources Trade associations Banks research studies. Financial and Industry analysis

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Sales Forecasting - Procedures

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Sales Forecasting - Procedures

Forecasting general economic condition
(gross domestic product GDP)

Value of all goods and services produced within a country during a given year Estimating Industry Sales - based upon the relationship between industry sales and a national economic indicator- GDP Projecting company & product sales Qualitative (opinion, judgment) Quantitative (mathematical)

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Sales Forecasting Methods

Qualitative
Jury of executive opinion Delphi Technique Sales Force Composite Survey of Buyers Intentions Factor Listing

Quantitative
Continuity Extrapolation Time Series Analysis Exponential Smoothing Regression Analysis Multiple regression Leading Indicators Econometric

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Sales Forecasting -

QUALITATIVE

Jury of executive opinion Oldest approach

Panel of sales, marketing research, accounting, production, each member provides written of his forecast group of experts, leading authorities from universities, private foundations, industry and government agencies used to make long range projections. the expert kept apart to form independent opinion & forecast The man in charge of this process is responsible for reviewing & compiling the opinions of the experts and deciding when the consensus has been reached Forecast arrived at by combing sales persons estimates of expected sales. It helps to set sales quotas
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Delphi Technique

Sales force composite

Sales Forecasting Survey of Buyers Intentions Factor Listing

QUALITATIVE

Potential purchasers are well-defined and limited in numbers Identification of factors affecting sales and their specific impact in the forecast period Factor listing method forces forecasters to quantify the reasoning behind their judgment A balance sheet showing all positive and negative influences on future sales Increased Industrial activity New housing scheme Below average temperature in summer (negative)

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Sales Forecasting Continuity Extrapolation

QUANTITATIVE

Sales 2009 was 290 million, 2010 is 310 million (6.9%), based on this 2011 forecast would be 331 million.(6.9) Fairly reliable for short term forecast period Projection of the average increment of sales change into the future. Assumes a continuation of firms or industry sales history and used for long-term company forecast and industry sales projections (10 years annual data for each time) Determined by 4 basic elements of sales variation
Sales = 1. Trends or long run changes X 2. Cyclical changes X

Time Series

3. Seasonal variations X 4. Irregular or unexpected factors

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Model-based Methods
Exponential Smoothing
technique weighted time series analysis

Actual sales of current period has more weight vs average sales of earlier period. Best for short term forecasting

Leading Indicators - Time series of economic activity which leads to change in

sales stocks prices, index of net business formation

Econometric Model - Complex forecasting model - Output (sales) of one industry is (input) purchases of another
industry

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Sales Forecast
Managing the forecast function Sales forecasting is complex, challenging task. Sales managers who are involved must deal with the following key issues
Who should be responsible for forecasting? Which forecasting methods should be used? What should the lengths of forecast be? How should forecast be evaluated?

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Sales Forecast
Responsibility
Varies among firms Sales forecasting function tends to be viewed as either a marketing, a sales or finance accounting function Recently marketing has assumed responsibility to develop sales forecast in most of the companies but with significant input of sales managers in all cases.

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Sales Forecast
Selecting forecasting methods
Best approach is to use combination of methods Its important to keep balance a forecast derived from quantitative approach against one developed by qualitative methods, and vice versa. Most companies use several different sales forecasting techniques, which vary by time horizon, size of firm and type of product. Combination technique improves forecasting accuracy and allows a firm to counteract most of the deficiencies inherent in using a single method.

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Sales Forecast
Lengths of Forecast Varies among firms Appliance manufacturer might prepare monthly, quarterly, and annual , as well as long-range projections for two to five years. Short-range forecast are likely to be more accurate than long-term predictions.

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Sales Forecast
Evaluation
Mostly sales managers are given this responsibility In other cases, high level management is charged with this duty Three objective criteria can be used to asses the accuracy of sales forecast.

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Sales Forecast
Evaluation
1. 2. 3 Major Criteria Comparison with total sales actual vs forecasted Comparison with actual change in total sales sales are expected to increase from 200 million to 230 million but only go up to 215 million, then sales forecast has failed 50% of the real change Comparison with other forecasting techniques Compare the result obtained from some naive method of estimates, such as extrapolating the last increment of change in sales. This approach allows the firm to assess whether or not a more sophisticated technique is beneficial

3.

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Guidelines for Forecasting

1 2 3 4 5

Use multiple methods Pick the right method for your business Use as much info as you can Plan for multiple scenarios Track your progress and adjust the forecast

The Forecasting Process

Look at Sales Potential: Gather Internal and External Info
External Customer & distributor surveys Market research conducted by other firms Government -generated info related to economy Experts opinions Internal Info generated by quantitative methods using sales data Sales mgrs estimate for their team Reps estimates of their sales Executives opinions Firms plans
13-30
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Forecast Sales
By product By territory

CompanyWide Sales Forecast

Set Quotas for the Period

For individual territories For regions

By customer type
By time period

THANKS

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