Sales forecasting is one of the major planning premises in business organizations. It is the result of numerous assumptions made about the external (industry sales, competitors’ actions, for example) and internal (costs, Technology, personnel, for example) environments of the firm.
Sales forecasting is the expected level of companies based on a chosen marketing plan and assumed marketing environment.
Benefits and Importance of Sales Forecasting
Importance and benefits of sales forecasting are explained under the following points:
1. Foundation of Planning
The foundation of the Planning efforts of most companies is a sales forecast.
The purpose of sales forecasting is to plan ahead and go about achieving forecasted sales in what management considers to be the most effective manner.
2. Allocation of Resources
Many large companies use their sales forecasts to allocate resources across different functional areas.
The production uses sales forecasts to develop production schedules and quantity requirements, and to regulate inventories; finance uses them to the set operating budgets and to project cash flows; human resource uses them to establish hiring levels, and marketing uses them to allocate resources across different marketing activities.
3. Key Factor in Business Operations
Once the sales forecast is prepared, it becomes the key factor in all operational planning throughout the company.
Forecasting is the basis of sound budgeting.
Financial planning for working capital requirements, plant utilization, and other needs is based on anticipated sales.
The scheduling of all products and services and facilities, such as setting labor needs and purchasing raw materials, depends on the sales forecast.
4. Basis of Salesforce Planning
The sales forecast also plays a critical role in Salesforce planning.
The sales forecast helps sales executives determine the budget for the department, and it also influences sales quotas and compensation of salespeople.
5. Major Role in Success
The forecast is an error, the plans based on it will also be in error.
For example, if it is overly optimistic, the organization can suffer great losses because of over expenditure in anticipation of revenues that are not forthcoming.
If the sales forecast is too low, the firm is not prepared to provide what the market demands.
This means that the company will be forgoing profits and giving its competitors a bigger market share.
Clearly, a valid sales forecast can play a major role in the success of the company.
6. Key to Sales Management
One of the keys to sales management success is knowing where customers are located and being able to predict how much they will buy.
Firms have found that potentials data are indispensable in setting up territories, assigning quotas, and comparing sales performance of individual salespeople.
Sales forecasting is so important that more than 50% of the firms include this topic in their sales manager training.
7. Helping in Profitability
A sales manager must know how to measure demand for today and how to forecast sales for tomorrow.
Inaccurate demand predictions can have disastrous effects on profitability.
8. Estimates of Future Sales
The face of events is moving so fast that unless we can find some way to keep our sights on tomorrow, we cannot expect to be in touch with today.
Sales forecasting specifies the estimates of future sales.
It helps to maintain a balance between demand and supply in the market.
9. Facilities Production Planning
The production department needs to know about sales forecasts so that they can arrange production planning.
There will be also we need to be the close and speedy liaison between production and sales to determine customer prioritizes is in the short term.
The production also needs long-term forecasts so that capital plant decisions can be made in order to meet anticipated sales.
10. Help in Purchasing
In the case of strategic materials or long delivery terms, sales forecasting provides guidance to the purchasing department to better plan their purchases.
Such advance warning will also enable purchasing to purchase more effectively from a price and delivery viewpoint.
11. Better Financial Planning
Financial and costing functions also need the medium-term forecast to budget.
The role of the sales forecast in sales budgetary procedure is very much clear.
The long term forecast is of value to financial Accountants in that they can provide for long-range profit plans and income flows.
They also need to make provision for capital items such as plant and machinery needed in order to replace old plant and machinery and to meet anticipated sales in the longer term.
12. Helps in Sales Strategies in Promotional Plans
Marketing needs the Sales forecast so that sales Strategies and promotional plans can be formulated in order to achieve forecasted sales.
13. Assists Research and Development
Research and development also need forecasts.
They will want to know the expected life of existing products and what likely changes will have to be made to their function and design in order to keep them competitive.
14. Facilitates Product Planning
With the help of sales forecasting, the requirement of different brands such as color, shape, design, and price, etc. can be determined in advance and thus necessary changes can be made in the product.
15. Better Inventory Control
Sales forecasting can remove the unnecessary costs and difficulties of storing the raw materials as the materials requirements are known in advance.
16. Other Benefits
- Sales forecasting helps in sales quota determination.
- It facilitates the expansion of Business and product diversification.
- It helps in determining a profitable pricing policy.
- Keeping in view the future sales, the selection of distribution channels becomes easier.
- It can act as a sales standard to compare the actual sales.
- It helps to coordinate with the various components of the external environment.
- It may become a basis for establishing new industrial units and facilitates foreign collaborative agreements.
Thus, now you know the benefits and importance of sales forecasting.