23 Criteria of Good Sales Forecast

Kulbhushan Chandel

1. Learning Outcome

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

Describe the concept of sales forecasting.
Explain the significance of sales forecast.
Explain various types of sales forecast.
Discuss the criteria of good sales forecast.

2. Introduction

Sales forecasting is the marketing activity that plays a vital role in the survival, existence and success of business organisation. A business can be either manufacturing concern or trading one, but forecasting of demand of the future sales is very much necessary all the types of business activities. Thus there is a need of accurate sales forecasting for the future in production as well as in marketing planning. A manufacturing concern must look forward to the future sales for its products and on the basis of the estimate made; the business organisation must develop its production planning. Similarly, a trader should forecast future demand for his product and on that basis; the required arrangements regarding the products should be made. Hence, sales forecasting and demand measurement constitute the building blocks of business planning and corporate operating strategy. The sales forecasting is very useful for financial planning, production planning, human resource planning, capital budgeting planning, dividend planning, pricing strategy planning, sales quota planning and many more. When the actual sales turnover reaches near the sales forecast, then it means that the marketing, financial and production decisions of the organisation are properly planned.

3. Major Concepts in Demand Forecasting

The major concepts in demand measurement are market demand and company demand and other concepts used are as follows:

Market Demand: Market demand for the product is the total volume of sales which the company could get from the sale of its products to the target group of customers in a targeted area in specified period of time.
Market Forecast: The marketing demand corresponding to the industry level of expenditure and efforts is market forecast.
Market Potential: Market potential is the highest limit which could be achieved by the company.
Company Demand: Company demand is the estimated share of the market demand at the alternative levels of company’s market efforts at a given period of time.
Company Sales Forecast: This is the expected level of company sales based on the chosen market plan and in an assumed marketing environment.
Company Sales Potential: This is the limit of which the company demand could approach by various marketing efforts.

4. Significance of Sales Forecasting

The sales forecasting is very essential for the success of any business organisation. Sales forecasting is the key element in conducting the business. Good sales forecast would help to conduct the business in a more strategic manner. Some of the essentials are as follows:

4.1 Production planning: Sales forecasting is the requirement for the production planning of a business firm. The expansion policies of the firm should be based on the sales forecasting. Or else there might be overproduction or under production and consequential losses may occur.

4.2 Control of business: For controlling the business on a sound footing, it is necessary to comprise a well regarded budgeting of costs and profit which are based on the forecast of annual sales and prices.

4.3 Inventory control: The proper control of inventories such as raw material, intermediate goods, semi-finished product, finished product, spare parts, etc. needs an accurate estimate of the future requirements, which is generally traced with the help of forecasting.

4.4 Growth and long term investment programmes: Sales forecasting is necessary in the determination of the growth rate of the firm and its long term investment programs in terms of capital budgeting expenditures.

4.5 Stability: Stability in production and employment over a period of time can be made successful by the management through proper forecasting of the market demand and other business variable. It also helps in the smooth functioning of the businesses operations through counter cyclical and seasonally adjusted business programmes.

4.6 Economic planning and policy making: Sales forecasting at economic level is of the great help to the policy maker for the better planning and rational allocation. The import and export policies can also be determined by government in view of the long-term sales forecasting for various goods and services in the country.

5. Market Measurement and Forecasting

Market measurement and forecasting generally means to forecast the sales. Sales forecast is based on assessment of market demand .Market demand is not only influenced by the market price of the product, rather various factors are present which affect the market demand of the product, such as marketing mix (4P) and marketing environment like level of competition, consumer behaviour, general economic environment, fashion trends government regulations etc. To measure and forecast the demand for any product the market could be classified in the following productive ways: –

Available market: The available market means a set of consumers who have a purchasing power and access to a particular product.
Potential market: Potential market is that set of consumers who express sufficient level of interest in a marketing offer in an industry at a given price, given level of expenditures and given commercial condition.
Target market: Target market is a part of total market that company decided to pursue.
Present Market: It is also called as penetrated market constituting the set of consumers who are using the company’s product.

Example: A person wanted to start a restaurant. He decided to open a small restaurant with four tables having seating capacity of six people at a rented place. So in all there would be space for twenty-four people.so after predicting about the sales, he decided about the menu of the restaurant. And decided to provide food at lunch and dinner times.

6. Process of Sales Forecasting

Sales forecasting process involves logical sequence as the planning process in the organisation. Following are the steps of sales forecasting process: –

6.1 Determine the objective of forecasts: The first step of sales forecasting process is the determination of the sales forecast of the company. The general purpose of forecasting is related to the short-term decision-making and to formulating the marketing strategies in the different areas of marketing mix.

6.2 Determine sales forecasting premises: This step involves the determination of key factors which adversely affects the future sales of the company. In determination of sales forecasting premises, the factors affecting the sales of each product, a programme of demand analysis, including the studies of economic factors, motivational considerations and competition, are usually necessary to isolate and measure the impact of various factors influencing the sales.

6.3 Selection of forecasting methods: There are numerous forecasting methods or the techniques, perfect choice of a method is a must, because, it is not possible to use all of them as they would be uneconomical for the company. The choice of method is generally determined by the purposes of the forecast and the kinds of information which could be obtained in the process.

6.4 Collection of data: The correct choice of a reliable forecasting method in the early step paves the way for gathering all the information which is available and relevant.

6.5 Analysis the data: The process of analysis of data is not an easy process. Like, for the projection of past sales some statistical techniques are used which involves some judgment; when opinion methods are used, great deal of subjectivity enters into the process of analysis. That is why, much care is to be exercised while analysing the data.

6.6 Interpretation of analysis: As the future is uncertain, the conclusions drawn from the sales forecast may invariably involve some margin of errors. To reduce this margin of errors, it is advised for the analyst to check and recheck the work. Ideally, two or more analysis should be carefully studied and the best possible forecast is to be adopted.

6.7 Formulate Assumptions: Assumptions prove the theories. The ability to forecast accurately depends either on the ability of the forecast to make good assumptions concerning factors which are not possible to be measured. For example, the character and intensity of competitor’s future programmes may be the solitary most important element influencing company’s actions and reactions in order to forecast future sales performance with fair degree of accuracy from the firm’s angle.

6.8 Translate results into forecasts: The deductions and assumptions made in the former steps need to be translated into specific sales projections so that they become useful for the company.

6.9 Apply the forecast to company operations: This step really takes the forecaster into decision making. Along with other types of information such as various marketing research findings, the forecast must be transformed into a marketing strategy. The efforts put in the elongated procedure are adequate reward in translation into an effective action plan.

7. Criteria of Good Sales Forecast

Joel Dean (1976) laid down the following criteria of a good forecasting method, which discussed as under:-

Accuracy. Forecast should be accurate as far as possible. Its accuracy must be judged by examining the past forecasts in the light of the present situation.
Plausibility. It entails understanding of the management about the method used for forecasting. It is essential for a correct interpretation of the results.
Simplicity. A simpler method is always more inclusive than a complicated one.
Economy. It should involve lesser costs as far as possible. Costs must be compared against the benefits of forecasts.
Quickness. It should yield quick results. A time consuming method may delay the decision making process which does not remain useful for the company.
Flexibility. There should be possibility of changes to be incorporated in the relationships entailed in forecast procedure from time to time and it should be maintained up to date. There must be kept provisions for making changes according to need.

8. Major Decision taken on the basis of Sales Forecasting

The major decisions taken on the basis of sales forecasting are as follows:

Number of salesman required
Allocation of sales quota to salesman.
Determination of sales force compensation plan.
Determination of sales territories based on the market potential.
Advertising and sales promotion programs.
Physical distribution and channel selection.
Pricing decision and strategy
Production plans
Inventory control and purchasing
Estimating standard costs
Budgeting and controlling expense
Planning requirements

9. Forecasting of Total Demand

For any company it is very much necessary to forecast the total demand for its products. This is mainly done to avoid any type of sudden fluctuations in the demand, to monitor the share of the company in the total market demand of that product. There are following steps which have to be followed by the company in forecasting of the total demand of its products:

9.1 Defining the Market: Before forecasting of demand the first step is the ascertainment and definition of the market in which the products of the company are sold in terms of present and future customer potential. The product demand is governed by numerous factors such as economic development, population, tastes and preferences of the consumers. In defining the market, all the potential consumers have to be considered.

9.2 Dividing demand into main component parts: There are generally heterogeneous consumers of the products. Thus, the market could be segmented on the basis of geographical conditions, literacy level, composition of age, income, buying behaviour to know when the purchase is made.

9.3 Forecasting the demand drivers: The drivers which help in the forecasting of the demand on the basis of different factors which influence the future potential also are known as demand drivers. Demand drivers have to be identified for each segment of the market differently. The main method used in this analysis is regression. Regression analysis helps to establish the historical connection between various factors and demand. But only limitation of this method is that it used past data and past data cannot be taken as guaranteed for future prediction. The main issues covered are demand, potential, potential demand and relevant potential.

9.4 Sensitivity analysis: After the making of the demand forecast then the analysis of the risks has to be made, which help in forecasting of the error. The identification of maximum and minimum level of errors helps in the critical analysis of the demand. Then, careful analysis of various drivers is done to forecast the respective effect upon them.

10. Limitations of Sales Forecasting

Sales forecasting is concerned with the prediction of the human behaviour regarding the demand for product or services under certain set of conditions. Generally, forecasts are found to be imperfect as human judgement plays a major role in forecasting. Hence, every forecast has some element of inaccuracy. There are certain causes for such state of inaccuracy, which are termed as limitations. These limitations are discussed as under:-

Difficulty in understanding market trends: There are a lot of factors which affects the market. Any factor can be overriding factor at any time. This requires the constant observation of the market and market analyst must be constantly on the alert to identify changes in consumer behaviour.
Ambiguous concept of demand: The concept of demand is not clearly understood and used by various analysts. Many words are used to express demand like international demand, national demand, industry demand, and company demand and so on. Sometimes many faulty assumptions are developed regarding the demand results in the inappropriate demand forecast.
Difficult to understand the competitor’s plans: Competition in the market is the dominant factor affecting the sale forecast. To ignore the competition is to misconstrue the major element in the market mechanism. Hence, constant efforts must be made to understand the plan of opponents.
Exact forecast is not possible: Management of a company must understand the fact that it is quite difficult to make precise forecast. Certain amount of error is always involved. This could be either due to slippery nature of market or wrong judgement of analyst.
Wrong selection of forecast technique: There are many techniques of sales forecasting like opinion of executives, opinion of sales forces, Delphi method, correlation, regression, times series and so on. The right selection of method depends upon the expertise of the analyst. The expert should verify the results with alternative technique also.
Expertise of executive: The ability of executive associate with the task of sales forecasting also determines the degree of accuracy achieved in case of forecast. It is only qualification and experience that can guarantee the accuracy and the best results in the domain of sales forecasting.

11. Marketing Information System

Marketing Information System means collection of information for

Control purposes which means to know what the sales departments are actually doing.
Information purposes which means to collect necessary information regarding the competitive activities, launch of new products, changes in the tastes and preferences of the consumers.
Communicating to all the departments’ necessary information so that they can also prepare their own budgets.

Thus, the data collection, generation, analysis, recording and processing and maintaining of the information is organised under marketing information system.

12. Summary

Sales forecasting is aimed at predicting sales on the basis of analysis of past sales performance and future market conditions. It guides a firm to look at the future objectively. A firm which reviews the past is aware of present and that firm analyses the future opportunities for prediction of future demand. Data generation is the pre-requisite of any professional organisation on the basis of which the sales decisions are taken. The data is taken from all micro and macro sources. Moreover, internal strengths and weaknesses and future opportunities and strengths are taken into consideration while forecasting the sales. Reliable, valid, sustainable and substantial database is necessary for the prediction of the business trends, cycle and futuristic business possibilities. Various techniques could be used for this. The marketing information system comprises of the data collection, generation, analysis, recording and processing and maintaining of the information. Sales forecast forms the base of the planning decisions of the company. For marketing department, it is the key to the planning of promotion programs, management of sales force, re allocation of the sales territories, planning of plant and warehousing facilities and all the other activities of marketing. Marketing Information Systems or the databases are naturally a must for reliable sales forecast and business planning. The general purpose of forecasting is related to the short-term decision-making and to formulating the marketing strategies in the different areas of marketing mix. In determination of sales forecasting premises, the factors affecting the sales of each product, a programme of demand analysis, including the studies of economic factors, motivational considerations and competition, are usually necessary to isolate and measure the impact of various factors influencing the sales. As the future is uncertain, the conclusions drawn from the sales forecast may invariably involve some margin of errors. To reduce this margin of errors, it is advised for the analyst to check and recheck the work. Ideally, two or more analysis should be carefully studied and the best possible forecast is to be adopted. 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.

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