Sales forecasting is an estimate of sales by a firm during the stated future period. It provides projections for budgeting and planning purposes. The result of demand forecasting is the sales forecast.
Process of Sales Forecasting
The sales forecasting process contains the following steps:
1. Determination of Goals
The sales manager should decide the goals for sales forecasts.
These objects may include determination of sales publicity program, marketing methods, sales quota determination, estimation of working capital requirements, and estimation of income and expenditure, etc.
2. Determining the Factors Affecting Sales
The controllable and uncontrollable factors affecting the sales must be identified.
The non-controllable factors are related to the external environment.
These include social systems, political activities, cultural changes, change in fashions income and expenditure, seasonal fluctuations, International Agencies, etc.
Data related to these factors must be analyzed by scientific methods to know their effect.
3. Selection of Techniques
The managers should ensure that the information gathered is sufficient and collected from reliable sources.
4. Collection of Data
This is the step of collecting various kinds of information and data related to the future demands for the product.
In analyzing a product’s market potential, it is necessary to identify markets. Market identification requires finding out:
- Who buys the product?
- Who uses it?
- Who are the prospective buyers?
It is also necessary to detect the reasons why customers buy the product and the reasons why potential customers might buy it.
Field Research and motivation research may be conducted to obtain such information. These data help in estimating market potential.
5. Analysis of Market Potential
Having identified the potential buyers and their buying behavior, the next step is to analyze the data of market potential.
This requires a two-step process:
- Select the market factors associated with product demand.
- Eliminate those market segments that do not contain prospective buyers of the product.
The sales manager should ensure that the information gathered is sufficient before doing analysis.
6. Forecasting of Future Sales
Sales projections should be made on the basis of analyze done.
A company may take a forecast for an entire product line of individual items within the line.
Sales may be forecasted for a company’s total market or for individual market segments.
After determining the market or sales potential for a product or service, management can make a sales forecast.
7. Converting Industry Forecast to Company Sales Forecast
Many companies forecast both their own sales and sales of the industry.
The general practice is to forecast industry sales early in the process and from it derive a company sales forecast for use as a check against forecasts arrived at through other methods.
Deriving a company sells forecast from an industry sales forecast requires an appraisal of company strengths and weakness against those of competitors.
The results are an estimate of expected market share that results in a forecast of company sales.
8. Making Operational Program and Budget
After the sales forecasts have been made, the firm determines the requirements for various operational activities such as production, purchasing, marketing, capital assets, workforce, research, and development. etc.
On the basis of forecasts, the related plans such as sales budget, sales quota, sales territory, sales publicity and materials acquirement are formulated.
The sales forecast provides the basis for developing company operating plans.
Everything is keyed to the level of expected sales Activity. The budgets are essentially based on the sells forecast.
If the forecast is wrong, the resulting budgets will have to be revised often to reflect actual sales results.
9. Derivation of Sales Volume Objective
A sales volume objective for the coming operating period is the hoped-for outcome of a company’s short-range sales forecasting process.
A sales forecast:
- It contains an estimate of sales tied to a proposed marketing plan or program.
- Assumes a particular set of economic and other forces outside the unit for which the forecast is made.
The sales forecast estimate does not necessarily become the companies sales volume objective, but it provides an orientation point for management’s thinking.
Further adjustments in the sales forecasts estimate are necessary whenever management decides to alter its marketing plan or program or changes that occur in competitors marketing strategies.
The sales volume objective should be consistent with management’s profit aspirations and the company’s marketing capabilities.
It must be attainable at costs low enough to permit the companies to reach its net profit objective, and the company’s marketing process must be capable of reaching the objectives set.
10. Evolution and Revision of Forecasts
Before submitting forecasts to higher management, sales executives evaluate them carefully, regardless of the extent of their personal involvement in the preparation.
Every forecast contains elements of uncertainty. All are based on assumptions. So, a first step in evaluating a sales forecast is to examine the assumptions on which it is based.
The company should review the sales forecasting process periodically.
The first step in the review is to determine the accuracy of past forecasts to learn if changes are needed in the way forecasts are made.
If the company finds that sales forecasts are significantly different from actual sales in the period, it should undertake a review of the sales forecasting process before making any fore more forecasts.
The evolution process then should view the data used in the sales forecasting.
Poor data collection methods can decrease the quality of the data used for forecasting, or the data may be inappropriate for forecasting sales of the product.
Sales executives should evaluate the accuracy and economic value of the forecast as the forecast period advances.
Sales Forecasts should be checked against actual results, a difference explained and indicated adjustments made for the remainder of the period.
When the period’s sales results are all recorded, all variations should be explained and stored for the future used in improving forecasting accuracy.
Thus, now you completely know the all major step in the process of sales forecasting.