Sales forecasting is an essential business practice. Sales forecasts allow business leaders to make wiser decisions about setting up goals, budgeting, hiring, and other things involving cash flow.
On the other hand, a wrong sales forecast leaves sales managers guessing whether they’ll actually hit the quota. Because of that, they may not be informed of any issues in the sales pipeline in time to fix them.
Now let’s look at what sales forecasting is, and some basics you need to know.
Definition of Sales Forecasting
Sales Forecasting is basically estimating future revenue by predicting the number of products or services a sales unit will sell in the next week, month, and year.
In other words: Sales Forecasting is an estimated measurement of how a market will behave to a company’s go-to-market efforts.
Types Of Sales Forecasting
There are mainly two types of sales forecasting.
- Short-term sales forecasting
- Long-term sales forecasting.
Now let’s discuss these types:
Short-term Sales Forecasting
This type of sales forecasting can be defined when it covers three months, six months, or one year. One year is the most preferred. The period depends on the business. If the demand varies from one month to another, forecasting may be done only for a limited period.
Purpose of Short-term Forecasting
- To adopt a suitable production policy.
- To gain proper control of the inventory.
- To cut down the cost of the raw materials and machinery.
- To determine the sales targets.
- In order to arrange the financial needs to meet the demand.
Long-Term Sales Forecasting
The forecasting that covers 5, 10 and even 20 years is called long-term sales forecasting. The period here also depends upon the business, but beyond 12 years, the future is uncertain. But in some industries like petroleum refinery, paper making industries, and ship-building, long-term forecasting is needed as the total investment cost of equipment is relatively high.
Purpose of Long-Term Sales Forecasting
- To estimate long-term financial requirements.
- To plan for the new production units.
- To expand the existing unit to meet the demand.
- To train the employees in order to meet the strong manpower requirement for future.
Methods of Sales Forecasting
Forecasting your sales only by gross volume deprives you of valuable information you can use to boost your profits and plan long-term strategies. Developing sales forecasts by factors such as product type, margins, and distribution channels helps you decide where to best give your efforts and resources to create more effective strategies.
Here are the various methods of sales forecasting.
1. Jury of Executive Opinion
This is the oldest method of sales forecasting. One or a more experienced executive with excellent knowledge of the market makes out the expected sales. In this method, the executives are mainly responsible for forecasting sales figures through experiences and estimates, taking all internal and external factors into account.
2. Salesforce Opinion
Under this method, sales agents or other intermediaries are required to make out an estimate of sales in their various territories for a period. Sales agents are in touch with the consumers and possess expert knowledge about future demand or trends.
But sometimes sales reps tend to overestimate sales forecasts, and there is no repeatable process to generate a consistent forecast with this method.
3. Customer’s Buying Plan
Consumers, as a crucial source of information, are meant to know their likely purchases during the period under a set of conditions. This approach is good enough when there are few customers. This type of forecasting is adopted for industrial goods. It is useful for industries that produce costly goods for a few buyers – wholesalers, retailers, potential consumers, etc. A survey is run on a face-to-face basis because changes are constant while buyer behaviour and buying decisions change frequently.
4. Test Marketing Result
In the market test method, products are presented in a limited geographical area and the result is studied. Then a sales forecast is made based on this result. This test is conducted in order to understand the market feedback.
5. Expert Opinion
In this method, several types of consultancy agencies have entered the field of sales. The consultancy agencies have specialized experts in their respective fields. This includes trade unions, dealers, etc. They may run market research and acquire readymade statistical data to forecast sales. Firms or factories use the opinions of such experts. The opinions of such experts may be carefully analyzed by the management team of the company and then sound forecasting is made.
6. Assess Historical Trends
This method includes examining sales from the previous year under similar conditions to estimate how you’ll perform in the present year. Split the numbers down by price, sales period, product, reps, and other important factors. Form those into a “sales run rate,” which is the number of projected sales as per sales period. This serves as the basis of your sales forecast.
This method is somewhat more accurate but ignores other factors that may have changed in the previous year, like the number of sales reps you have, or how your competitors are doing.
Sales Forecasting PDF
Importance of Sales Forecasting
- It helps businesses in planning, budgeting, managing risks and making better decisions.
- Good inventory control is effectively benefited by fending off the deficiency of overstocking and understocking.
- Sales forecasting facilitates the allocation and reallocation of sales territories.
- It allows companies to allocate resources effectively for future growth and manage their cash flow.
- It helps sales teams achieve their goals by identifying early warnings in their sales pipeline.
- Sales forecasting also encourages businesses to estimate their costs and revenue precisely based on the prediction of their short-term and long-term performance.
- Sales opportunities are searched out based on the forecast, and therefore the discovery of selling success is made.
- It is a measuring factor by which the efficiency of the sales personnel or the sales department can be measured.
- It helps in preparing production and purchasing schedules.
- It helps to decide policies.
Elements of Sales Forecasting
Here are some elements of a good sales forecasting method.
Accuracy: The previous method must be monitored for want of accuracy by observing whether the forecasts made in past are accurate or not.
Simplicity: this method should be easy to understand and simple, which can satisfy the top management persons.
Availability: The forecasting technique must be able to produce meaningful results. It also should be easy to implement.
Economy: Cost is the most significant factor so, the method adopted should borrow a minimum cost.
Factors Affecting Sales Forecasting
Sales forecasting is the core of marketing management. It attempts to determine the volume of sales which can reasonably be expected scientifically.
Following are the factors that affecting sales forecasting:
1. Economic Conditions:
The price level, profit rates, interest rates, national income, and rental rates all help to determine the market potential and then the sales forecast.
2. Business Conditions
The economic conditions consider the same industry and the business, There are related factors, such as developmental strategies adopted in state and national plans, the taxation policy of a government, credit lending policies, and public opinion. These factors help to forecast sales and find out company’s share in the market.
3. Socio-Economic Conditions:
The political and socio-economic environment of a country also affects sales forecasting. These environments contain some elements, which are- standard of living, per capita income, monetary circulation, globalization, geographical dimensions, fashions, urbanization, etc.
4. Internal Policies:
Every company has its own internal policies like- advertising policy, distribution policy, pricing policy, profits policy, organizational structure, etc. are the factors that are affecting the sales forecasting.
5. Competitive Conditions
Competition makes every participant improve upon his equals for survival and progress. The competitive conditions within the industry change frequently. The size of operations, technical expertise, quality enhancement, etc. all decide the success rate of an organization.
6. Foreign Trade Conditions:
Some foreign trade conditions like- trade restrictions, availability of foreign exchange, and control on import exports, etc. affect sales forecasting sometimes.
Terms Related To Sales Forecasting
Following are some terms related to sales forecasting:
Demand forecasting is making estimations about future customer demand over a limited period, using historical data and other information.
Right demand forecasting gives businesses valuable information about their potential in their present market and other markets so that managers can make informed decisions about pricing, business growth approaches, and market potential. Read more>>>
Forecasting is an approach for making predictions of the direction of forthcoming trends based on the analysis of past and present performances and data. Businesses use forecasting to figure out how to allocate their budgets or plan for expected expenses for an upcoming season.
Mostly, it is a decision-making tool that facilitates businesses to cope with the impact of the future’s concern by analyzing historical data and trends. It is a planning tool that permits businesses to chart their next moves and create budgets that will surely cover whatever uncertainties may occur. Read more>>>