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Chapter 13

Sales Forecasting

An annual sales forecast is a prediction of sales volume over the coming year. This
multifaceted tool fulfills many functions that can assist Field Managers in evaluating
sales team performance. In this chapter we will provide you with some simple but
effective techniques for designing an annual sales forecast.

A sales forecast can be expressed in both monetary terms (value) or in units.

Companies uses sales forecasts to determine what quantity of product to make, what
kinds of products to make, and how many employees to allocate to producing and
selling these products. Forecasting is a mixture of both science and art. The science is
in the study of past data and the art is in the adaptation of these numbers into a
predictive model that will forecast the future. The most common approach to forecasting
is to use historical data to create a basis from which to predict future trends.

Using Historical Data for a Sales Forecast

A historical chart is a listing of product sales over the past several years. A five-year
listing is usually adequate. For the sake of example, we will illustrate the use of
historical data for the fictional product Funionil.

Table 1 shows that Funionil sales have had fairly consistent growth over the past five
years. From this chart we can see what times of the year we sell more Funionil, and
whether we have been doing a better or worse job over time. Also, the figures can show
whether growth has been steady over the past few years, when it has increased the
most, and when sales have gone down.

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Funionil - Five Year Sales History

Funionil
Sales By Month—Past Five Years
(in $ thousands)
Month 19954 19965 19976 19987 19998 % of
Annual
Sales
January 110 127 132 141 147 7.87
February 112 129 135 142 150 8.03
March 115 130 137 144 152 8.14
April 119 132 138 145 153 8.19
May 123 135 140 147 156 8.35
June 127 137 141 148 159 8.52
July 135 139 143 152 160 8.57
August 134 139 145 153 160 8.57
September 135 137 144 153 161 8.62
October 128 132 142 148 158 8.46
November 125 130 141 147 156 8.35
December 126 131 140 145 155 8.30
Totals 1,489 1,598 1,678 1,765 1,867
(6.9%) (5.0%) (5.2% (5.8%) (5.72%)

With these numbers we can create a graph that illustrates more clearly the past sales
trends. We can see from the chart, for example, that Funionil has a seasonal growth
period in August, September, and October. Also, we can see that sales have more or
less increased steadily by approximately 5% per year. If we use this as a guide, we can
project that Funionil sales for 1998 will grow by 5.72%. Plotting the trend line involves
two simple steps: getting the data and plotting the line.

Step 1—Getting the Data

Finding the sales data can be either be the easiest or the most frustrating part of putting
together a sales forecast. Consistent figures are the key. If sales accounting methods
changed over the past five years, you should take this into account. Sales can be
measured in either units or monetary amounts. The key is to use the same units for
every year. Using a sales figure for every month will provide 60 different numbers if we
look back five years (5 years X 12 months) which we can plot on an simple chart similar
to the example below.

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In our Funionil example, our sales figures go back to 1994. For January of that year,
sales were $110,000. In December we had increased our sales to $126,000 for the
month. Further examination shows, however, that for all the months in between, sales
were not steady. The fluctuations in seasonal selling periods show up here. The column
showing percentage of yearly sales helps the forecaster predict seasonal variations
because it measures the contribution made each month to the total yearly sales figure.
For the example of January, 1994, this month contributed 7.38% of the annual total
($110,000 / $1,489,000 X 100).

Graphing the Data and Plotting the Curve

Once all the numbers have been entered and calculated, they represent the
accumulation of five years of sales activity. The problem, however, is that it is difficult to
visualize any trends by simply looking at columns of numbers. For this reason, we may
find it useful to plot them on a graph. A graphic illustration of past sales makes it much
easier to spot current trends (Figure 1).

A graph of these numbers is simple to set up. First, along the horizontal axis, we have
marked all of the years that we recorded from January, 1994, to December, 19989.
Note to Bill: Please adjust the graph and sales table in Figure 1 to reflect Jan 1995 to
Dec. 1999. By the the time this book is printed, it would be around 2000. So,
Dec.1999 would be most current.
Along the vertical axis, we numbered from 100 to 170 to represent the sales figures.

Now with our sales data from the chart, we simply locate the sales amount for each
month of each year, mark that amount with a dot, then connect the dots to create a plot
of all 60 months. With the help of this graphic curve, trends are much easier to
visualize.

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Revised
170 Prediction

160

Original
150 Prediction

140

130

120

110
19954 1995 1996 1997 1998
19992000

Figure 1 Five Year Sales History Graph

We can see, for example, that in 19954 there was incredible growth and that in 1995,
although there was an increase in sales, it was not as dramatic. In 1996 growth slowed
and 1997 growth picked up a little. In 1998, however, Funionil was back on track and
sales increased by 5.8% over the previous year. Using this chart we can all see that
average annual growth has been about 5.7% (6.9% + 5.0% + 5.2% + 5.8% / 4). Using
this number as a starting point we can now plot a rough growth estimate of 5.7%. This
revised prediction is shown on the chart as a shaded line.

The Use of Variable Data

If this was all that was involved in sales forecasting, we could all become wealthy as
professional predictors. However, we now need to look into those variable factors that

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turn forecasting into an art, and we do this by creating a sales forecasting worksheet.
We have incorporated questions below that may have a positive or negative impact on
your sales forecast. These are by no means comprehensive, but they do offer a guide
of what variables to anticipate in factors that can positively or negatively affect your
sales forecasts. Each question corresponds to a percentage adjustment up or down on
the following worksheet, and from this worksheet a rough projection of future sales can
be made:
1. Do you anticipate a price increase in the coming year?
2. Are new products being introduced? Are these volume products or line extensions?
Each of these will change the amount of expected growth by different amounts.
3. Is business expanding? Are additional accounts likely to be added?
4. Will additional sales people be hired for your district? How many?
5. How experienced is the sales team? Are they new or seasoned professionals? Do
you expect them to need extra help in selling over the coming year?
6. What is your promotional spending budget for the product (next year compared to
past years)? How do you plan to use it?
7. Do you know the buying plans for major customers? Do they have large inventories
of your product? What is their status with regard to credit and receivables? If
substantial receivables need to be paid for or if large inventories of your product are
still waiting to be moved, these numbers will affect your sales predictions.
8. Is the market segment for your product increasing or decreasing? If the entire
market segment for pharmaceuticals of Funionil's therapeutic class is growing, then
opportunities also could be increasing for your product.
9. Do you have a sales territory that will be vacant for some time? If your district is
expanding or if it will be difficult to replace a departing representative, some
allowance needs to be made for the potential sales that may be lost.
10. Are your competitors introducing new products? Are you expecting newer
competition on the scene? Are your competitors lowering their prices? What is the
spending budget of your competitors? Are they planning to increase their
promotional spend expenditure significantly?

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11. Is there the possibility that one of your major formularies may drop your product? If
this is the case, then it should be accounted for in the final assessment. Of course, if
no products are expected to be dropped, then this allowance can be omitted.

Sales Forecast Worksheet

Straight line projection from a five-year trend 5.7%

1. + Percentage allowance for price increase 1.0%

2. + Allowance for a new line extension 2.5%

3. + Allowance for anticipated new business 1.0%

4. + Allowance for additional sales people 1.3%

5. +/- Allowance for competency of sales team -0.7%

Û. +/- Promotional spend +0.5%

7. +/- Known buying plans for major customers -1.5%

8. +/- Allowance for expansion or contraction of market segment +0.8%

9. - Allowance for anticipated vacant territory -1.3%

10. - Allowance for competitor's new products -2.0%

11. - Allowance for losing a major customer 1.0%

This Year's Projection Total 6.3%

The percentages presented here are purely hypothetical and we are using them only to
illustrate an approach to sales forecasting. Your numbers will need to be based on the
opinions of informed sources within your district and company.

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Back to the Graph

Using our second worksheet we have now come up with an adjusted sales increase of
6.3%. In our example we have plotted this on the graph with the dashed line.

Now, back to the original numbers. By the end of 19998, Funionil sales for the year had
reached $1,867,000. Adding a 6.3% increase means we can now project sales of
$1,984,000 for 1999 2,000 ($1,867,000 x 1.063).

As you can see, making an annual sales forecast through historical data and variables
is a simple procedure. It is, in fact, a good idea to involve the medical representatives in
your district in preparing your annual sales forecasts. Besides making them sales
conscious, your representatives can benefit from taking part in preparing an annual
forecast several ways:
 The five-year account-by-account analysis will provide a good overview of the
representatives’ territories.
 Because it is self-generated, it can be a source of motivation because it involves the
representatives in the planning process. When variances occur, the representatives
will be motivated to find out why their predictions were not accurate.
 New sources of prescriptions can be found through closer examination of the data.
Sales forecasting will help convince your medical representatives as to the
reasonableness of the sales year quota.

No forecast is going to be accurate all of the time. A good forecast is part detective
work, part guess work, part experience, and all hard work. In the end, enter all the
available data, listen to the opinions of your team and colleagues, take a best guess at
a number, then work hard to make that guess come true.
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