Meaning of Sales Forecasting
Sales forecasting refers to a method of making predictions about future sales revenue likely to be earned by business. It simply involves estimating that how much of the business products are going to be sold within a plan future period at a particular price and in a particular market. Sales forecasting is carried out on the basis of reliable data related to economic trends, industry-wide comparisons and past sales data. Companies can forecast weekly, monthly, quarterly and annual sales data by employing the technique of sales forecasting. A sales forecast predicts how the market is going to react to go-to-market efforts of company.
It is used by every manufacturer for taking right decisions related to production activities. Businesses are able to produce good in right quantity and at right price by carrying out their operations systematically as per the plan. Also, they are able to make an advance arrangement of means of production such as materials, machinery and labor in sufficient quantity. In absence of a proper sales forecast, business may work at random thereby putting at risk the large amount of capital invested by businessmen.
Types of Sales forecasting
Various techniques of sales forecasting are as explained below: –
- Jury or executive opinion method: Jury method is the most simple and conventional method of sales forecasting. In this method, sales forecasts are made on the basis of opinions given by company’s top executives. These executives are well-experienced and knowledgeable about market factors which make up the expected sale. The past business performance, current market conditions and future trends are considered by them before arriving to any conclusion. The major demerit of jury method is that it is merely based on opinions rather than facts or figures.
- Opinion poll of sales force: It is a method in which opinions of sales representatives are considered for sales forecasting. Their opinions form the basis for making estimations about sales of firm in future. Sales representatives have good knowledge of market conditions in their respective territories. This way the views of salesmen are considered important factor for making future predictions.
- Survey of buyers’ intentions: Under this method, firstly a list is drawn up comprising of all prospective customers. Now the buyers are approached directly in order to have a face-to-face interview for ascertaining their intentions. This way the customers requirements in nearby future are known which help in estimating the products sales of firm. Survey of buyers’ intention is very practical method of sales forecasting which is generally used by marketers of industrial goods.
- Market test method: Market test method is one in which a direct test is conducted by business in market. The test enables in knowing the intentions of buyers which form the basis of sales forecast. Market test method is either used independently or in supplement to other methods. It is more generally used by marketers of consumer goods and when used by industrial good marketers then it is termed as a market probe.
- Time series analysis: Time series analysis is an approach in which only normal trends are considered for making sales forecasts. It ignores the cyclical changes, long-term trends, seasonal variations and irregular fluctuations in sales of concern. This is an inexpensive method which is most widely used by business organizations.
- Statistical demand analysis: Under this approach, the key factors influencing the sales are taken into consideration. These factors are price of products, disposable income available with people, population, advertising programme etc. All these are analyzed in order to make predictions about future sales of firm products.
- Products in use analysis: Here, a census is performed related to products or close brands already in use in market. The sales forecast for products is done on the basis of information collected via census. This approach considers 2 main assumptions. At first, it assumes that future market of product changes in direct proportion to quantity already in use. Secondly, it is assumed that the current users of product of concern will continue to patronize the same in future.
- Past sales projection: It is an approach under which past sales of company are studied for making sale forecasts. This is a simple method in which some changes are made in past sales for predicting the future sales. Projection of past sales technique is safer for companies indulging in more and less stable industries. However, it is not reliable in case of new products or new companies.
- Industry forecast and share in industry sales: It is a method in which sales forecast for firm is obtained by applying a certain percentage to sales forecast of whole industry. The whole industry forecast is obtained from trade associations, government or another outside agencies. It is very simple, quick and inexpensive method of carrying out a sales forecasting.
Objectives of Sales forecasting
The objectives of sales forecasting approach are well-discussed in points given below: –
- Sales forecasting enables in determining the production volumes by business thereby accordingly arranging the facilities such as capital, equipments, manpower, space etc.
- Sales forecasting form the basis for production budget, sales budget, natural budget etc.
- It provides a commitment level to sales department of business which need to be achieved within the specified time period.
- Sales forecasting facilitate business in right decision making by providing relevant market information.
- All decisions related to plant expansion and variations in production mix or whether the resources should be diverted for producing products are taken with the aid of accurate sales forecasting.
- Accurate sales forecasting assists in preparing schedules related to production activities and purchase of materials.
- Sale forecasting guides the production, marketing and several other key business activities leading to accomplishment of pre-established targets.
Factors influencing the sales forecasting
Different factors influencing sales forecasting approach are as follows: –
- General economic conditions: Proper knowledge of economic conditions in country is must for doing a right sales forecast. The forecaster should consider the general economic trends such as inflation or deflation which influence business favorably or adversely. A forecast can be carried out more accurately if political, economic and general trends of business are properly known. There are various other factors which affect the efficiency of forecast such as historical market behaviour, consuming habits of consumer, national income, disposable income etc.
- Consumer: A sale forecasting is affected by the nature and type of customer surrounding the market. Demand for products like wearing apparel, furniture, vehicles, luxurious goods etc. are influenced by population size by its composition- age, sex, religious habits, fashion trends, social group influences and economic conditions. All these factors carry weight and need to be considered by forecaster before coming to a conclusion.
- Seasonal demands: Some products have seasonal demands based on periodic events which may raise the sales and revenue of business significantly. Forecasting of sales is at best an estimation game for business which is dependent upon the factors that are considered for doing it. In order to ensure the accuracy of forecast, business must consider the season demands of products.
- Industrial behaviour: Business forecast are influenced to a great extend by marketing behaviour of firms operating within the same industry. There are various firms providing same product and compete with one another for raising their sales level. It is must for forecaster to carefully observe the pricing policy, designs, promotional activities, technological improvements etc. of competitors. Any new business coming up with products in market naturally influence the market share of pre-existing firms.
- Internal organizational changes: Future sales of business are affected by variations in their pricing, product quality and advertisement policy. A systematic evaluation of the effect of these factors on sales volume should be carefully done. The sales volume of organization can be raised by providing concession to customers, enhance advertising policies, price cutting, raising sales promotions etc.
- Period of time: Sales forecasting is also affected by the time period for which business need to predict their sales. The information to be used for making estimation shall be gathered on basis of short run, medium run or long run forecasts.
Advantages of Sales forecasting
The advantages of sales forecasting are: –
- Gain of valuable insight: Forecasting provides a valuable insight into business health while analyzing the past and real time data for predicting future demand. This way it gives an opportunity for correcting and making adjustments in business.
- Decrease cost: Sales forecasting enable companies in decreasing their cost by accurately anticipating the demand of products. Business will focus more on producing those products which are needed by peoples, decreasing the excess inventory level and ultimately leading to raise the profitability.
- Cash flow: It facilitates company’s in maintaining an optimum cash flow at all the times. When business is aware whether its revenue will rise or shrink in nearby future, they can accordingly plan their spending. It will enable companies in taking advantage of expansion opportunities or special deals.
- Planning: Businesses are able to do their planning in best way possible when they have a good idea of future revenues. Uncertainty serves as an obstruction tool in the growth and expansion way of your business. Performing a reliable forecast enables business in taking advantage out of future changes in economy. Deep analysis about buying trends of customers, economic trends, new products and past revenue of your company serves as an strong basis for effective future planning.