Sales Forecasting

What is Sales Forecasting?

●A sales forecast is a projection of the expected
customer demand for products or services at a specific company, for a
specific time horizon, and with certain underlying assumptions
● Essential tool used for business planning, marketing, and general
management decision making.
● Sales forecasting can help you achieve sales goals.
● Sales forecasting can help drive sales revenue, improve efficiency,
increase customer retention and reduce costs.

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 Factors affecting sales forecasting
External Factors

● Relative state of the economy

● Direct and indirect competition
● Styles or fashions
● Consumer earnings
● Population changes
● Weather

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 Factors affecting sales forecasting
Internal Factors
● Labour problems
● Inventory shortages
● Working capital shortage
● Price changes
● Change in distribution method
● Production capability shortage
● New product lines

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Objectives of sales forecasting
• The main objective of sales forecasting is to paint an accurate picture
of expected sales.
• Sales teams aim to either hit their expected target or exceed it.
• Outside of just aiming for accuracy, though, sales teams hope their
forecasts will achieve two simple objectives:
Smooth internal operations: When the forecast is met, the friction
inside the organization – about all the things revenue funds – melts
away. Trade-offs and compromises don’t need to be made about
things like cutting the workforce, reducing support, or halting product
development. Instead, business hums along nicely.
• Smooth external operations: Every company wants to delight its
customers and partners. When forecasts are met and internal
operations are flowing as they should be, your company can continue
funding external marketing events, staffing ample customer service
touchpoints, investing in its community, and more. From the outside,
it’s clear that everything inside is working as it should be.
Forecasting Approach
Top down forecasting
• Top-down forecasting is a method of estimating a company’s future
performance by starting with high-level market data and working
“down” to revenue.
• This approach starts with the big picture and then narrows in on a
specific company.
Forecasting Approach
Bottom-up or Build-up Approach
• Bottom-up or build-up approach starts with the company's area or branch managers asking
their salespersons to estimate or forecast the sales for individual customers in their
respective territories.
• Sales persons are given guidance by their respective area/branch sales managers on how to
get information from the existing and potential customers.
• Each area or branch manager then adds the sales forecasts received from the salespersons,
modifies the same wherever needed and sends the combined sales forecast figure for each
product in units and value to his superior, that is, regional or zonal sales manager.
• Each regional/zonal manager adds the sales forecast received from the area or branch
managers, modifies the same, if needed, and sends the regional sales forecast to the
sales/marketing head.
 Sales Forecasting Methods
Qualitative Quantitative

Executive opinion method Time Series Analysis

Delphi Method Market Test Method
Poll of sales force Regression Analysis
Survey of Buyer’s intentions
Projection of past sales

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Jury of Executive Opinion
There are two steps in this method:
1. High ranking executives estimate probable sales.
2. An average estimate is calculated.
• The assumption is that the executives are well informed about the industry outlook and the company‘s market position,
capabilities, and marketing program.
• All should support their estimates with factual material and explain their rationales.
● Most widely used
● Leads to a quicker (and often more reliable) result without use of elaborate data manipulation and statistical
techniques.

• This is a quick and easy way to turn out a forecast.

• This is a way to pool the experience and judgment of well-informed people.
• This may be the only feasible approach if the company is so young that it has not yet accumulated the experience to
use other forecasting methods.
• This method may be used when adequate sales and market statistics are missing
The jury of executive opinion method has weaknesses.
• Its findings are based primarily on opinion, and factual evidence to
support the forecast is often sketchy.
• This approach adds to the work load of key executives, requiring them
to spend time that they would otherwise devote to their areas of
main responsibility
The Delphi Technique
• Several years ago researchers at the Rand Corporation developed a
technique for predicting the future that is called the Delphi technique this is
a version of the jury of executive opinion method in which those giving
opinions are selected for their ―expertise.
• The panel of experts responds to a sequence of questionnaires in which the
responses to one questionnaire are used to produce the next questionnaire.
• Thus, information available to some and not to other experts is
disseminated to all, enabling all to base their final forecasts on ―all
available information.
• Some contend that ―this technique eliminates the bandwagon effect of
majority opinion.
Poll of Sales Force Opinion
• In the poll of sales force opinion method, often tagged ―the grass-roots
approach, individual sales personnel forecast sales for their territories; then
individual forecasts are combined and modified, as management thinks
necessary, to form the company sales forecast.
• This approach appeals to practical sales managers because forecasting
responsibility is assigned to those who producer the results.
• There is merit in utilizing the specialized knowledge of those in closest touch
with market conditions.
• Because the salespeople help to develop the forecast, they should have greater
confidence in quotas based upon it.
• An other attractive features is that forecasts developed by this method are
easy to break down according to products, territories, customers, middlemen,
and sales force.
• But the poll of sales force opinion approach has weaknesses.
• Not generally trained to do forecasting, and influenced by current
business conditions in their territories, salespersons tend to be overly
optimistic or overly pessimistic about sales prospect.
• f the ―forecasts of the sales staff are used in setting quotas, some
sales personnel deliberately underestimate so that quotas are
reached more easily.
Projection of Past Sales
• The projection of past sales method of sales forecasting takes a variety of
forms.
• The simplest is to set the sales forecast for the coming year at the same
figure as the current year‘s actual sales.
• Or the forecast may be made by adding a set percentage to last year‘s sales,
or to a moving average of the sales figures for several past years, for
instance, if it is assumed that there will be the same percentage sales
increase next year.
• Projecting present levels is simple and inexpensive for forecasting method
and may be appropriate for companies in more or less stable or mature
industries.
 Survey of Buyer’s intentions
Process Includes asking customers about their intentions
to buy company product & services
Questionnaire may contain relevant questions

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Time-series Analysis
• Not greatly different in principle from the simple projection of past sales is
time series analysis, a statistical procedure for studying historical sales data.
• This procedure involves isolating and measuring four chief types of sales
variation: long term trends, cyclical changes, seasonal variations, and
irregular fluctuations.
• Then a mathematical model describing the past behavior of the series is
selected, assumed values for each type of sales variation are inserted, and
the sales forecast is “cranked out.”
• For most companies, time series analysis finds practical application mainly
in making long range forecast.
Time Series
Analysis
Make forecasts based purely on historical patterns in the data. It has
four components
➢The Trend component-Gradual upward or downward
movement over time.

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➢ The Cyclical Component
Sales are often effected by swings in general economic activity as
consumers have more or less disposable income available

The Cyclical Component

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➢The Seasonal Component
It is a distinguished pattern to sales caused by things such as the
weather, holidays, local customs and general consumer behaviour.

The Seasonal Component

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Exponential Smoothing
• One statistical technique for short range sales forecasting, exponential
smoothing, is a type of moving average that represents a weighted sum
of all past numbered in a time series, with the heaviest weight placed
on the most recent data.
• To illustrate, consider this simple but widely used form of exponential
smoothing a weighted average of this year‘s sales is combined with the
forecast of this year‘s sales to arrive at the forecast for next year‘s sales.
• if, for example, actual sales for this year came to 320 units of product,
the sales forecast for this year was 350 units , and the smoothing
constant was (0.30)(320)+ (0.7)(350) = 341 units of products.
Exponential
Smoothing

● Instead of weighing all observations equally in

generating the forecast, exponential smoothing
weighs the most recent observations heaviest
Next year’s sale=a(this year’s sale) + (1-a)(this year’s forecast)
a is smoothing constant taken in scale 0-1

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 Market Test Method
● Used for developing one time forecasts particularly relating to new
products
● A market test provides data about consumers' actual purchases and
responsiveness to the various elements of the marketing mix.
● On the basis of the response received to a sample market test, product
sales forecast is prepared.

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Benefits of Sales Forecasting
● Better control of Inventory
● Staffing
● Customer Information
● Use for Sales People
● Obtaining Financing

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Limitations of Sales Forecasting
● Part hard fact, part guesswork
● Forecast may be wrong
● Times may change

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