22 Sales Forecasting

Kulbhushan Chandel

1. Learning Outcome

After completing this module, the students will be able to:

Describe the concept of sales forecasting.
Explain various types of sales forecast.
Discuss the nature of sales forecasting.
Explain various techniques of sales forecasting.

2. Introduction

Sales forecasting is the systematic and scientific manner of estimating the sales in terms of volume and value of a product for a particular period, in a specific market. Sales forecasting supply a starting point for all business activities of a company. It is a tool of control in the hands of marketing management and is the rational act of estimating the sales potential for a company including the assessment of efforts of competitors and an appraisal of the trends of industry and economic environment that have impact on demand.

As defined by American Marketing Association,

“Sales Forecasting is an estimate of sales in dollars or physical units for a specific future period under a proposed marketing plan or a programme under an assumed set of economic and other forces outside the unit for which forecast is made”.

Thus, sales forecasting is that branch of managerial forecasting, which projects the sales for a future period in a specific market under certain conditions and guiding the resources allocation and marketing efforts in attainment of the organisational objectives. The concept of sales forecasting can explained with help of mathematical model. Sales forecasting is the function of two variables namely market potential and market share. This relationship can be expressed mathematically as under:-

Sales forecasting = Market Forecast × Market Share

3. Types of Sales Forecasting

The accurate sales forecasting is pre-requisites for the success and survival of any business. Sales forecasting bridges the gap between present and future sales. There are two types of sales forecasting such as; forecasting based on the level and forecasting based on time duration. These two types of sale forecasting are illustrated as under:-

3.1 Forecasting on the Basis of Levels: While forecasting the future sales, a company has to consider both the economic level and the industry level. Thus, the sales forecasting might be undertaken at following three levels:

3.1.1 Economic forecasting: It is also known as macro forecasting. It refers to the aggregate demand for industrial output by the nation as a whole. In this, the sales forecasting is made at the national level by the analysis of the economic trends. The company appraises the data and information given by the government agencies with regard to national income, gross domestic product, gross national product, inflation, consumption pattern, employment position and so on. In addition to this information, a company also has to analyse the fiscal and monetary policy of government, behaviour of stock market, pattern of the trade cycle and even the political philosophy to determine the economic activities of the nation. If all these factors are favourable then the overall demand for the goods and services may tend to rise or vice –versa. The accurate economic forecast requires systematic and scientific collection of relevant data and analysis and interpretation there on.

3.1.2 Market forecasting: The next step in the sales forecasting is to evaluate the marketing opportunities in terms of estimations of total market demand. Market demand for a product is the total volume that could be bought by a target group of customers in a particular area, in a specific time under specified marketing conditions.

Market demand: Market demand shows the consumer demand under the expected level of marketing efforts which can be put forward by all sellers within industry.
Market potential: market potential is the maximum limit which could be approached by market demand.

3.1.3 Sales forecasting of company: Company demand is the company’s estimated share of market demand under the given environmental conditions for a specific company.

Company sale forecast: – It is the estimated sales under a defined marketing programme.
Company sales potential: –This is the maximum sale limits approached by the company demand as the company’s market efforts increases relative to that of competitors.

3.2 Forecasting Based on Time: For the purpose of marketing decision making sales forecasting can be classified into three categories; short-term, medium-term and long-term forecasting. These three forms of forecasting are as follow:-

3.2.1 Short-Term Forecasting: Short-Term forecasting generally refers to a period not exceeding a year. Short-term sales forecasting refers to the determination of the volume of current demand for a firm’s product for a short period of time say over a month or a year. Short-term forecast relate to the day-to-day forecast which are connected with deliberate decision under the given resource constraint; as in the short run, the available resources, scale of operations, etc., are fixed or unalterable. In short-term forecasting, a firm is primarily concerned with the optimum utilizations of its existing productions capacity. The significance of short-term forecasting reflected in the following areas of business:-

Sales policy: – A short-term sales forecasting is helpful in developing a suitable sales policy in view of the seasonal variation of demands, so as to avoid the problems of short supply or oversupply of the firm’s product in the market.
Price policy: Short-term sales forecasting will help the firm in the determination of a suitable price policy to clear the stock during of seasons, and to take advantage in the peak seasons.
Purchase Policy: In view of the short-term forecasting a firm can evolve a realistic purchase policy for buying raw materials and controlling its inventory stocks with a great economy.
Sales target: – Sales forecasting helps the business firm in setting sales targets and for establishing control over the business operation. It is of no use in fixing high sales targets, when sales forecasting reveals a decline in a quarter.
Short-term financial planning: – A firm’s short-term financial planning can be suitably determined on the basis of short-term demand forecasting. A firm’s prerequisite for cash depends on its productions and sales. Without accurate sales forecasting a rational financial planning is quite difficult.

3.2.2. Medium-Term Forecasting: Medium-term forecasting bridges the gap between short-range forecasting and long range forecasting. It covers a period from 1-3 years. The planning process of company is based on the medium term forecasting. The medium range forecasting helps in predicting the general pattern of trade cycles and the effects of technological and social changes on the business processes and operations. The main purpose of medium term forecasting is determination of control by budgets over expenses, ascertain the cash flow, assessing the manpower requirements, determining the divided policy, deciding the rate of maintenance expenditures, and determining the schedule of operation.

3.2.3 Long-Term forecasting: Long term forecasting refers to the forecasts made for long period during which the firm’s scale of operation or the production capacity may be expanded or reduced. Long-term forecasts are normally for the period exceeding 3- 5 years or even a decade or more. But this long period may differ from industry to industry and business to business. The long term forecasting may serve the following purpose in the organization:-

Business planning. Long term forecasting is of great significance in the long term business planning. Long term sales potential will provide the required guidelines for planning of a new business unit/product for the expansion of the existing one.
Human Resource planning. It is essential to determinate long term sales forecast for an appropriate human resource planning in the organization. In the absence of proper sales forecasting, there may arise the situation of over staffing or under staffing, which could be serious for the business.
Long-term financial planning. Finance is the key to the success, survival and growth of modern business. In view of the long term sales forecasting and the production planning, it becomes easier for the firm to determine its long term financial planning and programmes for raising the fund from the capital market.
Extrapolation method: This method is based on the assumption of the past pattern of industrial behaviour and marketing environmental stability. It uses the projection and trend for arriving at the figure of sales forecasting.

Example: various baby food items are now available in the market. These are also made on the basis of the sales forecast. From an infant of few days to an adult, all food items are available in the market. When the baby’s powder milk is concerned, the Nestle India is manufacturing the product under Brand name Lactogen, Cerelac is also there. All these are baby products which are manufactured by the company as per the needs and requirements of the customers.

4. Nature of Sales Forecasting

It is very necessary for the sales decision maker to be aware about the relevant sales data. The sales decision maker must be aware about the basis on which the future sales are to be forecasted and how accurately the future can be predicted on the basis of the past information. The future prediction of the study depends upon the base of prediction and it should be stable. Moreover, there should be regularity in that base. The main purpose of forecasting is to forecast and how frequently there is need of forecasting, how far it is needed to forecast the products, how accurately the forecast can be made and how accurately the forecast be made. All these decisions are taken while forecasting the sales. The main functions of forecasting of sales are as follows:

The forecast could be made for ascertainment of the changes to be made in the course of sales. If it is desirable to make a change in sales, then new course of action is needed.
Then forecasting is done to make sure that the each forecast is made to attain the specific business objectives. The cost benefit analysis is the most effective method which should be chosen at this point. Here, the choice is to be made from numerous alternatives. So, the most beneficial method should be chosen.

The course of action might bring the change in the product line which could have occurred due to change in demand, or it could be a large initiative i.e., to launch a new marketing technique for more advertisement of the products, or even a combination of both could be there.

5. Factors Affecting Sales Forecasting

The sales forecasting serves as the foundation for the planning and budgeting activities of the firm. The decisions in the marketing areas both inside and outside of the firm are influenced by the sales forecasting. Sales forecasting is a process of estimating the future sales which are influenced by many controllable and uncontrollable variables. The factors that need to be given the attention by the sales analysts are as under: –

5.1 Economic environment: The general economic conditions prevailing in the country have considerable impact on sales forecast of the company. These conditions are mainly price level change, change in national income, profit rates, interest rates, rent rates, per capita income, disposable income, discretionary income, consumption patterns, saving and investment habits, employment position, compensation paid to working class, programmes of national building and so on. These factors help in deciding the market potential of the company which ultimately helps in deciding about the sales forecast.

5.2 Business circumstances: Business circumstances generally refer to the economic conditions relating to the same industry or trade and business. These relate to the factors such as fiscal policy, developmental strategies adopted in state and national plans, possibilities of marketing of manufactured products, foreign trade policy, public opinion, credit policies, and lending policies of commercial and industrial banks and other financial institutions, trade practices and controls or regulations, extent of state participation in business, policies of transport and warehousing agencies. These factors help in arriving at company’s share in market and hence finally deciding the sales forecast.

5.3 Sociological conditions: These conditions relate to the population size, density, change in age groups, birth and death rates, size of family, family dependents, level of education, family income, social awareness. The study of social conditions provides an additional dimension to the accuracy in assessing the sales potential and sales forecast.

5.4 Psychological conditions: The Psychological conditions have more philosophical impact on the market conditions than the social conditions. Every human being is not only a social being but also a rational being. In psychological conditions basically the changes in the mood of the markets which is reflected in changing habits, attitudes, perception, learning, personalities, life styles, cultural and religious bents, tastes, preferences, fashions and the likes. The changes in consumer tastes, habits, likes and dislikes have far reaching impact on demand and hence sales potential and the sales forecast.

5.5 Competitive environment: As business is does not occur in isolation, it has to face competition by the rival units in the same business line or same business activity. These competitive conditions make every firm to improve winning his rivals for survival and success. The competitive conditions within the industry keep on changing constantly. Competitors may enter or exit the industry. The size of the operations, technical superiorities, quality of managerial sophistication in the areas of production and distribution-all decide the success. It is basically the study of market share of competitors and how to expand the company’s share over those of competitors by refining the plans, strategies and techniques in manufacturing and marketing.

5.6 Internal dynamics of organisation: Internal situation refers to the policies and strategies adopted by the firm to preserve its interests. Internal conditions speak of happenings in the company’s life career. These relate to the policies in production, distribution, finance, promotion, quality, personnel and price areas. These internal conditions are controllable and help us to bring about changes in the marketing mix. However, changes in market mix and strategies have deep impact on volume and value of sales of the company and, hence ultimately affect the sales forecast.

On the basis of above analysis it can be concluded that the factors affecting sales forecasting can be classified in two groups such as controllable factors and uncontrollable factors. The controllable factors are those factors that can be controlled with the help of efficient management. These factors include quality of products, price of product, sales promotions measure and marketing research etc. Whereas the second class of factors include those variable which are non-controllable like; government policy, competition, business cycle, innovations, social changes, general economic and political situations etc.

6. Techniques of Sales Forecasting

The method of sales forecasting are generally divided into two categories, viz., qualitative techniques and quantitative techniques. These both techniques are discussed as under:

6.1 Qualitative Techniques:

These are also known as subjective methods. Some of the important methods are discussed below:-

Opinion of executives: This is the oldest method of sales forecasting which is a based on a broad guess made by executive member of the business. One or more top executives forecast future sales on the basis on personal knowledge and on market information through customer contacts or by reading publishing data. This method has the weakness of biased and it also lacks scientific validity.
Sales force opinion method: Many companies use this sales force opinion method for estimating the sales on the basis of the estimates given by salesmen, which are then consolidated by sales manager for a territory or region and for the company. Since they have direct contact with customer and first -hand field information, they can estimate future buying intentions of customers. Some salesmen may be even over-optimistic or too pessimistic about future sales prospects.
Buyer’s survey intentions: Customers are requested to communicate their buying intentions in a coming period. It is suitable only for those businesses which are selling products to a few key customers. If costumers’ expectations are accurate, sales forecasts could also be accurate.
Statistical sampling: Sampling can be used to get total sales estimates. Data can be extended or generalized to get total sales forecast based on sample survey done in representative sub-groups of territories.
The Delphi method: Delphi method is a method of avoiding the problem and biases involved in the forecasts of demand. In this method, the participants make forecast without disclosing their names and they state their assumptions in it. Then, the analysts return the forecasts to each of the participants and they are made t look and analyse the assumptions of other participants. This process continues until no further convergence is possible.

6.2 Quantitative techniques:

These techniques are also known as objective methods. Some of the important methods are discussed below:-

Correlation analysis: A correlation study is done when there is a close relationship between sales volumes and a well-known indicator of demand. A high correlation values indicated the future sales volume.
Regression analysis: Regression analysis is the most commonly used method for demand forecasting. The constraints of the demand function are estimated with regression analysis. In demand regression equations, relevant variable have to be included with practical considerations and relevant data have to be obtained. The regression analysis is performed as, firstly the predictor variables are selected which are considered to be the major determinants of sales. Then, time series is collected for each predictor variable. The relation of each predictor variable is checked with the demand to find out whether it is linear or curvilinear. Then regression analysis is run and goodness of fit is determined. All the steps are repeated until a satisfactory model is obtained. Satisfactory model is the one which by using the past data provides a most acceptable degree of accuracy.
Time series analysis: This is a common mathematical projection of future sales which involves the projection of past sales trends into the future. In time series analysis there are four types of projections. Trend which determines the basic long term pattern of growth, stability and decline. Seasonal which shows the variations in the trend due to seasonal factor such as summers, winters, etc. Then is cycle which shows variations over a period of time generally more than one year. For calculating seasonal fluctuations in the demand any of these methods could be used, namely, moving average method, exponential smoothening or statistical trend analysis.
Moving average method: In this method, the trend is determined by selecting a period for moving average like, 3 yearly moving averages, 4 yearly moving averages, 5 yearly moving average etc. The moving average shall be computed as under:-

Extrapolation method: This method is based on the assumption of the past pattern of industrial behaviour and marketing environmental stability. It uses the projection and trend for arriving at the figure of sales forecasting.

Due to the reason that no method of forecasting could be considered as the perfect method, the marketers generally use the combination of the above stated methods for forecasting the demands and the sales.

Example: Private insurance companies have now over one fourth of the total market share of the business. According to the data provided by the Insurance Regulatory Development Authority, private insurers have managed to corner as much as 25.74% of the market share till September 2005. (Source: the Economic Times, 3 November 2005)

Summary

The creation of the sound sales forecast is the fundamental to any organisation. Sales forecasting data is needed to determine and forecasting the marketing plans and strategies. Managers have to forecast the sales for the future period of time which is done on the basis of the present and past sales pattern. Marketing managers have to forecast the future sales of the firm, whether they uses qualitative techniques, or quantitative techniques. Various different departmental budgets such as sales budget, production budget, administrative budget and marketing budgets all are based on the master sales forecast. Information collected from all the sources of the organisation are used for the forecasting of the sales. Data collected by an organisation can be used in the future by the time series analysis. The usage of these types of methods helps the managers to model the seasonal effects. Linear and multiple regression techniques are used for the econometric procedures. Thus, forecasting is the logical point for all the business activities. It acts as a link between the planning and controlling. Forecasting is the encroach of marketing research. Marketing research provides marketing management with numerous techniques such as qualitative depth interviews, Delphi techniques and many more. Thus, sales forecasting is a very significant function of firm’s integrated marketing information system.

Suggested Readings (Books and Websites)

Ghosh PK, Sales Management- Text and Cases, Himalaya Publishing House, 2010.
Jobber David and Lancester Geoff, Selling and Sales Management, Pearson Education, Sixth Edition.
McCarthy, Jerome E. (1964). Basic Marketing. A Managerial Approach. Homewood, IL: Irwin.
Needham, Dave (1996). Business for Higher Awards. Oxford, England: Heinemann.
Kotler, Philip (2012). Marketing Management. Pearson Education. Kotler, P. and Keller, K. (2006), Marketing and Management, Pearson Prentice Hall, Upper Saddle River, NJ, USA
McCarthy, Jerome E. (1975)”Basic Marketing: A Managerial Approach,” fifth edition, Richard D. Irwin