Lesson 2: Sales Forecasting

Unit 1: Definition of Sales Forecasting
Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Therefore, the sales forecast indicates as to how much of a particular product is likely to be sold in a specified future period in a specified market at speci­fied price.

Accurate sales forecasting is essential for a business house to enable it to produce the re­quired quantity at the right time. Further, it makes the arrangement in advance for raw mate­rials, equipment’s, labour etc. Some firms manufacture on the order basis, but in general, firm produce the material in advance to meet the future demand. Forecasting means estimation of quantity, type and quality of future work e.g. sales.

For any manufacturing concern it is very necessary to assess the market trends sufficiently in ad­vance. This is a commitment on the part of sales department and future planning of the entire concern depends on this forecast. The management of a firm is required to prepare its forecast of share of the market that it can hope to capture over the period of forecasting.

In other words, sales forecast is an estimate of the sales potential of the firm in future. All plans are based on the sales forecasts. This forecast helps the management in determining as to how much revenue can be expected to be realised, how much to manufacture, and what shall be the requirement of men, machine and money.

Thus we can define sales forecasting as, estimation of type, quantity and quality of future sales. Goal for the sales department is decided on the basis of this forecast and these forecasts also help in planning future development of the concern. The sales forecast forms a basis for production targets.

Unit 2: Uses of Sales Forecasting
The uses of sales forecasting are many. It serves various purposes for organizations and for individuals. Some of the uses of sales forecasting are

a. Sales forecasting is used for planning purposes
b. It is used to calculate future sales
c. It is also used to project revenues
d. It is used to calculate profits, expenses and revenues
e. It is used to effect decisions.

a. Sales forecasting is used for planning purposes
Sales forecasting is used for planning purposes. The process helps to describe how the sales activities of an organization are run. The process explains how customers are satisfied and how products are supplied and distributed.

All sales and marketing strategies are anchored on sales forecasting. Companies rely on sales forecasting to plan for production; supply and sales of products and services for a fiscal year.

b. It is used to calculate future sales
Sales forecasting is used by companies to calculate their future sales. Companies use sales forecasting to project and set goals of the sales they expect in the future. Sales forecasting assists organizations in deriving at how much to be made in a fiscal year. Sales forecasting help organizations to set targets for the revenue to be generated in a period. It helps them in estimating their actual sales

c. It is also used to project revenues
Sales forecasting is used by organizations to institute and set their revenue projections for a fiscal year Sales projection is a tool used to find out the amount which an organisation will make after a year’s sales activities. Sales forecasting help to set projections for company’s venue.

d. It is used to calculate profits, expenses and revenue
Sales forecasting ¡s used by organizations to calculate profits, expenses, revenue and cash flow. It helps to calculate the amount to make as profit in a business in a year. The total amount of payment to be made and how much to realize in a year is calculated through sales forecast. Sales forecasting help organizations to estimate their profitability, expenses and cash flow.

e. It is used to effect decisions
Effective sales decisions are made by organizations through sales forecasting. It helps as a tool for decision and support. The growth and success of organizations rely on their sales forecast. Decision making and implementation can be effectively carried out through sales forecasting.

Unit 3: Types of Forecasting Methods
Forecasting methods are of various types. Organizations make use of sales forecasting for various purposes. The forecast methods they use include the following:

a. Qualitative method
b. Quantitative method
c. Economical/casual method
d. Probabilistic method
e. Judgemental method
f. Simulation method
g. Artificial intelligence method.

a. Qualitative method
This method is a method which emphasizes forecasting on quality. The views of customers are sought and surveyed for its compilation. Qualitative forecasting allows for opinion of experts to be sought vis-à-vis customers’ view about products. Expectations of consumers, executive opinion, etc are some of the methods of qualitative forecasting.

b. Quantitative method
By this method of forecasting, numerical facts are used to project future sales through statistics. The prominent quantitative forecasting methods are time series and explanation methods. Algorithm of varying complexity is the bases with which quantitative forecasting rely on.

c. Economic/casual method
In economic /casual forecasting, future market events are predicted. The movement in the market in the nearest future may be affected by variables of the predictions. Customers are affected by the variables which are determined by the economic /casual forecasting method. The advert of company’s product for a new season is usually made through the casual forecasting method.

d. Probabilistic method
The opinions of the future are examined and taken care of by the probabilistic method. With this method, different outcome are achieved. By this method, in-house expert’s opinions are employed to forecast sales volume and ideas. Through the probabilistic forecasting method, 1 to 99 percent of sales volume is given.

e. Judgemental method
By this method, various sources of subjective inputs are considered. It is a forecasting method which carries out sales forecast within a short period of time. Judgemental forecasting comes to play when the available data is out of date. Lack of data collection period leads to application of Judgemental forecasting method. It can also be applied when alien historical data is scarce. Management opinions, sales force opinions and consumer surveys are types of judgemental forecasting method.

f. Simulation method
The future actions and situations of the system are predicted and forecasted through the simulation forecasting method. With the use of rules and equations, simulation forecasting method is described quantitatively. The influence of the behaviour and its control mechanisms are exposed through the simulation forecasting method. The changes that help the system to work well are identified through this method.

g. Artificial Intelligence method
This method of forecasting is a method which assists the best forecast. Sales forecast accuracy is achieved and built upon through the artificial intelligence forecasting method.

Unit 4: Importance of Sales Forecasting
Sales forecasting is a very important function for a manufacturing concern, since it is useful in following ways:

(i) It helps to determine production volumes considering availability of facilities, like equipment, capital, manpower, space etc.

(ii) It forms a basis of sales budget, production budget natural budget etc.

(iii) It helps in taking decision about the plant expansion and changes in production mix or should it divert its resource for manufacturing other products.

(iv) It helps in deciding policies.(v) It facilitates in deciding the extent of advertising etc.

(vi) The sales forecast is a commitment on the part of the sales department and it must be achieved during the given period.

(vii) Sales forecast helps in preparing production and purchasing schedules.

(viii) Accurate sales forecasting is a very good aid for the purpose of decision making.

(ix) It helps in guiding marketing, production and other business activities for achieving these targets.

Unit 5: Factors Considered for Sales Forecasting
Following factors should be considered while making the sales forecast:

1. Competition:
To assess demand, it is the main factor to know about the existing and new competitors and their future programme, quality of their product, sales of their product. Opinion of the customers about the products of other competitors with reference to the product manufactured by the firm must also be considered.

2. Changes in Technology
With the advancement of technology, new products are coming in the market and the taste and the likings of the consumer’s changes with the advancement and change of technology.

3. Government Action
When the government produces or purchases then depending upon the government policy and rules, the sales of the products are also affected.

4. Factors Related to the Concern Itself
These factors are related to the change in the capacity of the plant, change in price due to the change in expenditure, change in product mix etc. Accurate sales forecasting is essential for a business house to enable it to produce the re­quired quantity at the right time.

Further, it makes the arrangement in advance for raw mate­rials, equipment’s, labour etc. Many firms manufacture on the order basis, but in general, every firm produces the material in advance to meet the future demand.

Unit 6: Types of Sales Forecasting
There are two types of forecasting: 1. Short-term forecasting and2. Long-term forecasting.

1. Short-Term Forecasting
This type of forecasting can be defined when it covers a period of three months, six months or one year. Generally, the last one is most preferred. The period is dependent upon the nature of business. If the demand fluctuates from one month to another, forecasting may be done only for a short period.

Purpose of Short-Term Forecasting
1. To adopt suitable production policy so that the problem of overproduction and short supply of raw material, machines etc. can be avoided.
2. To reduce the cost of raw materials, machinery etc.
3. To have proper control of inventory.
4. To set the sales targets.
5. To have proper controls.
6. To arrange the financial requirements in advance to meet the demand.

2. Long-Term Forecasting:
The forecasting that covers a period of 5, 10 and even 20 years. The period here also de­pends upon the nature of business, but beyond 12 years, the future is assumed as uncertain. But in many industries like ship-building, petroleum refinery, paper making industries, a long term forecasting is needed as the total investment cost of equipment is quite high.

Purpose of Long-Term Forecasting
1. To plan for the new unit of production or expansion of existing unit to meet the demand.
2. To plan the long-term financial requirements.
3. To train the personnel so that man-power requirement can be met in future.

Unit 7: Marketing Survey
Marketing survey entails the study of the power of a consumer to spend within a geographical area. Competitors, customers and company’s knowledge are measured through marketing survey. The survey assesses customer’s preference and feelings in a market.

Through marketing survey, salesmen interact with their customers. Proper market survey can be achieved through the following:

a. Issuing and collecting questions and their answers as data for the work.
b. Preparing and distributing the research work forms.
c. Assigning a time for the survey.
d. Working on all the factors that might affect the survey.
e. Identifying the location of customers in a geographical area.
f. Noting where should be surveyed.
g. Observing the size and extent of the market to be surveyed.
h. Doing the survey and working on the response and result.

Unit 8: Advantages and Disadvantages of Forecasting

Advantages of Forecasting
Forecasting has the following benefits namely;

a. Predicting the future
b. Ensuring customers’ satisfaction
c. Learning from previous happenings
d. Saves cost of staff
e. Sustains competing power
f. Attracts financing
g. Reducing cost of inventory

a. Predicting the future
Companies predict their future with the aid of forecasting methods. Companies future when rightly predicted assist in achieving their goals and objectives. Market volumes are achieved by companies through future prediction.

b. Ensuring customers’ satisfaction
Forecasting assists in making customers happy always. They are happy because they are frequently supplied with their needed products. Their demands are therefore promptly met through proper forecasting.

c. Learning from previous happenings
The past of companies are learnt through forecasting. By forecasting, companies learn from their past and adjust where necessary to prevent future happenings that may affect them badly.

d. Saves cost of staff
Through proper forecasting, the staff strength of an organization is determined. The process helps in ascertaining the number of workers that may be needed in an organization at a particular period. The process saves wastages and cost of staffing especially those that are not useful.

e. Sustains competing power
Companies are able to remain in market competition through forecasting. They were able to remain competitive as they observe and understand what other companies have in stock and strives to meet up to the standard.

f. Attracts financing
Companies receive financial help from financial companies through effecting of forecasting results. They receive financial aids as they have worked in necessary and needed factors like collaterals and others.

g. Reducing cost of inventory
The amount of inventory expected of a company at a given time is usually determined by forecasting. The process helps in reducing inventory costs. General costs on production, distribution and others are minimized after projection and forecasting. In other words, wastages and damages are prevented through forecasting.

Disadvantages of Forecasting
The following are the disadvantages of forecasting:

a. No accurate result
b. Costly venture
c. May lead to loss of fund
d. May cause wrong decision
e. Data are difficult sometimes

a. No accurate result
Forecasting does not give accurate account of data at times. They are projected and done in abstract. So, having accurate data and information through them cannot be guaranteed.

b. Costly venture
Forecasting is material consuming and are expensive to carry out. Its tools and personnel cannot be quantified or measured.

c. May lead to loss of fund
Wrong or badly carried out forecast can lead to financial ruin or loss of fund. Badly forecasted data can lead to wrong calculations for a company and can lead to loss of resources and goods.

d. May cause wrong decision
Organizations may involve in wrong decisions if forecasting is badly or wrongly carried out. Bad forecasting can therefore lead to wrong decisions.

e. Data are difficult sometimes
Interpreting and analyzing data got through forecasting at times remain difficult. Organizations where data are badly or wrongly analyzed run into problems and end up getting professionals to do the job for them. This costs them more and extra from their proposed budget.

EVALUATION QUESTIONS
1. What is sales forecasting?
2. Name and explain the uses of sales forecasting.
3. Mention and describe the types of forecasting methods
4. Describe marketing survey.
5. State how proper marketing survey can be achieved.
6. List and discuss the advantages and disadvantages of forecasting.

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