.

The Importance of Sales Forecasting

Sales forecasting is a self-assessment tool for a company. You have to keep taking the pulse of your
company to know how healthy it is. A sales forecast reports, graphs and analyzes the pulse of your
business. It can make the difference between just surviving and being highly successful in business. It is
a vital cornerstone of a company's budget. The future direction of the company may rest on the accuracy
of your sales forecasting.
Companies that implement accurate sales forecasting processes realize important benefits such as:
1. Enhanced cash flow
2. Knowing when and how much to buy
3. In-depth knowledge of customers and the products they order
4. The ability to plan for production and capacity
5. The ability to identify the pattern or trend of sales
6. Determine the value of a business above the value of its current assets
7. Ability to determine the expected return on investment (This can be very helpful if the company is
trying to obtain financing from investors or other lending institutions)
The combination of these benefits may result in:
• Increased revenue
• Increased customer retention
• Decreased costs
• Increased efficiency
For sales forecasting to be valuable to your business, it must not be treated as an isolated exercise.
Rather, it must be integrated into all facets of your organization.
Back to Outline
II. What Information Is Needed to Prepare a Sales Forecast?
Since the forecast is based on your company's previous sales, it is necessary to know your dollar sales
volume for the past several years. To complete a thorough sales forecast, you also need to take into
consideration all of the elements, both internal and external, that can affect sales.
Mathematically, it is possible to forecast sales with some precision. Realistically, however, this precision
can be dulled because of external market and economic factors that are beyond your control. The
following are some of the external factors that can affect sales:
• Seasonality of the business
• Relative state of the economy
• Direct and indirect competition
• Political events
• Styles or fashions
• Consumer earnings
• Population changes
• Weather
 • Productivity changes
Sales forecasting requires sufficiently detailed analysis of both the external and internal factors related to
the sales function. Internal factors that can affect sales are somewhat more controllable, such as:
• Labor problems
• Credit policy changes
• Sales motivation plans
• Inventory shortages
• Working capital shortage
• Price changes
• Change in distribution method
• Production capability shortage
• New product lines
The sales forecast must be qualified by asking the following questions:
1. What are the items to be forecasted (individual product lines or business units)?
2. How far in the future should the forecast extend?
3. How frequently should the forecast be made?
4. How frequently should the forecast be reviewed?
5. What would constitute an acceptable tolerance of forecast error?
The following internal data will be scrutinized and analyzed when conducting a sales forecast. Therefore,
this data must be prepared on a consistent basis:
1. Accounting records
2. Financial statements
3. Sales-call reports
4. After-sales service demands from clients
It is significant to note that if you sell more than one type of product or service, you should prepare a
separate sales forecast for each service or product group. The more focused your sales forecast is, the
more precise its outcome will be.
Back to Outline
III. How Long and How Often Should One Forecast?
A sales forecast needs to be performed, reviewed and compared with actual performance results on a
regular basis. Think of it as a routine tune-up that keeps the gears of your business running smoothly so
your company can achieve a higher performance record.
Although every business owner's comfort level may be different, sales forecasts should be conducted
monthly during the first year, and quarterly after that. The more often you forecast, the better your
chances of weeding out extreme variations in year-to-year sales. It will also possibly identify a trend or
level of variations that is more realistically oriented to probable future sales patterns.
Although any forecast has a percentage of uncertainty, the farther into the future you project, the greater
your uncertainty. As a rule, there are three lengths of time for sales forecasting:
 1. Short-range forecasts are for fewer than three months. They are used to make continual
decisions about planning, scheduling, inventory and staffing in production, procurement and
logistics activities.
2. Intermediate forecasts have a span of three months to two years. They are used for budgetary
planning, cost control, marketing new products, sales force compensation plans, facility planning,
capacity planning and process selection and distribution planning.
3. Long-range forecasts cover more than two years. They are used to decide whether to enter new
markets, develop new products or services, expand or create new facilities, or arrange long-term
procurement contracts.
Perhaps the simplest method is to assume that the percentage increase (or decrease) in sales will
continue and that no market factors will influence sales performance more in the future than in the past.
Back to Outline
IV. Forecasting Techniques
Sales forecasting isn't that difficult. In fact, even if you've never conducted a formal, written forecast,
you've probably used at least some sort of informal method, whether you know it or not. To prove this
point, answer the following questions.
Top of Form

1. Have you ever questioned your inventory requirements?

2.

Yes No
3. Have you ever checked that there were sufficient salespeople to cover all territories?
4.

Yes No
5. Have you ever questioned your total sales?
6.

Yes No
7. Have you ever checked what volume has been achieved with a specific customer?
8.

Yes No
9. Have you ever analyzed what causes a slump or jump in sales in a particular region?
10.

Yes No
Bottom of Form

If you answered "Yes" to any of these questions, you've conducted an informal sales forecast.
There are two main approaches to sales forecasting: quantitative and qualitative, or judgmental. Often
companies utilize both methods at the same time.
Simply stated the word quantitative means estimating a particular, indefinite or considerable amount of
anything. Quantitative techniques rely primarily on numbers to conclude forecasts. These numbers are
multiplied, added or correlated and then placed in a formula to predict the company's sales. You can start
by building up to aggregate totals of market demand, or start with these totals and work the numbers
down into more focused forecasts for individual products. Quantitative techniques are calculated from
important numbers such as sales volume, gross national product, disposable income, and total number of
buyers in the market. These numbers have been shown to have significant value in forecasting.
If demand for your product is highly stable and predictable, the forecast consists of past sales and
inflation to predict future sales. In formula form, it is simply: Past Sales + Percentage of Inflation Factor
= Sales Forecast
Monthly Forecasts
In the event that monthly variations over a period of years have been small, another method of
forecasting can be based on the distribution of sales by months.
Suppose, for instance, that a short-term forecast is being made for the month of October. For the past
several years, sales in October have totaled 12.5 percent of annual sales. During the same period,
August sales have averaged 10 percent of annual sales. Sales during the previous August were $16,000.
$16,000 / .10 = $160,000 (estimated annual sales)

Projected sales for October will be 12.5 percent of $160,000 (or $20,000). Sales for other months can be
forecast in the same way.
Next Step: Compute Your Monthly Sales Forecast (Qualitative Method)
(Remember that if you sell more than one product or service, you'll need to prepare a separate forecast
for each line and combine them to get a company-wide forecast.)
VIII. Who Should Prepare Sales Forecasts?
Most business experts agree that sales forecasting should be a joint effort. Generally the best people to
perform such activities are those most closely involved with the company's sales activities. Involvement
includes not only direct relationships with customers, but also an awareness of market conditions.
Including key staff members from production, inventory management and marketing promotes a spirit of
teamwork and improves your ability to make projections.
The decreasing cost of personal computers has made it possible for small- and mid-sized companies to
handle forecasting internally. However, there are also many firms that you can contract with to assist you.
Locate them by obtaining referrals from your peers or checking trade publications.
Back to Outline
IX. Software as a Tool for Sales Forecasting
Projections become even more precise when software programs written specifically for sales forecasting
are utilized. Investing in a simple but effective forecasting package can also free up the time of valuable
personnel. All basic sales forecasting software packages evaluate the history of your business,
extrapolate pertinent information, and offer a forecast of your company's future.
When shopping for a good software package, look for the following features:
 1. Capability to adjust for special factors, i.e., promotion and price changes
2. Documents underlying forecasting assumptions
3. An effective management review and communication step
4. Historical data-tracking and plotting of current performance against past trends and future
projections
5. Allows multiple parties (e.g., sales, marketing, manufacturing and logistics) to enhance,
manipulate and use the forecast
Unfortunately, such programs are not usually stocked in computer software stores. To locate the
companies that produce this type of software, you can contact professional associations, check ads in
your professional magazines, and talk with other businesspeople for recommendations. The Internet is a
great additional source for seeking out these companies, and a simple search will bring up several
choices.
As you research forecasting software you will find those that run the gamut of very affordable to very
expensive. Some examples include: Strategic Planning Software ($29), Ward System Group's Neuroshell
PREDICTOR ($395) and ParkerSoft Products' Exforecaster 1.0 ($99) and Fastcast ($600.00).
Before purchasing a program, it is advisable to either download or request a demo program for
evaluation. Be aware that some software programs are not stand-alone and often require another
program such as Excel and Oracle Personal Express to be installed on your computer.
Sales forecasting is an unwieldy and difficult process, yet doing it correctly is key to understanding what's
in store for your business' future. The numbers you come up with will permeate almost every aspect of
your company, making it all the more important to ensure accurate forecasts. By using the information
presented here, you can develop a realistic projection for the future performance of your organization
Sales forecasting is estimating what a company's future sales are likely to be based on sales records as well as
market research. Information used for sales forecasting must be well organized and may include information on
the competition and statistics that affect the businesses' customer base. Companies conduct sales forecasting
in hopes of identifying patterns so that revenue and cash flow can be maximized
Before the forecasting process begins, marketing, sales, or other managers should determine how far ahead
the forecast should be done. Short-term forecasting is a maximum of three months and is often effective for
analyzing budgets and markets. Intermediate sales forecasting is between a period of three months and two
years and may be used for schedules, inventory and production. Long term forecasting is for a minimum of two
years and is good for dealing with growth into new markets or new products. Sales forecasts should be
conducted regularly and all forecasting results need to be measured so that future methods can be adjusted if
necessary.
Basically, sales forecasting is analyzing all parts of a business from total inventory to the strengths and
weaknesses of salespeople. Managers must think about changes in customer sales or other changes that
could affect forecasting figures. They must be competitive when assessing the competition and how they can
surpass the competition to better meet the needs of the target market.
Forecasting analysis involves the use of computer software. Sales forecasting software includes different sales
management categories and it also keeps track of different departments. Sales forecasting software may have
a dashboard format in which charts and statistics are easily accessible on one page. Dashboard software is
preferred by many managers as rather than having to look through lengthy reports to find information,
everything is charted and graphed and set out much like the dashboard of a car with its information readable at
a glance of its gauges.
Businesses can customize dashboard and other sales forecasting software to suit their specific needs. For
example, sales goals can often be placed on the same page as the chart feature that tracks their progress.
Orders and proposals submitted to clients can be tallied and organized. Quarterly revenue flows may be
displayed with forecasted future revenue for instant progress status. The performance of sales staff can also be
tracked using forecasting software.
Sales Force Automation
 Sales Forecasting

Sales forecasting can often be a mystery to your management team, but NetSuite CRM+ takes the guesswork out of
forecasts with real-time sales data, complete visibility into opportunities, and a rich set of forecasting tools. NetSuite's
advanced forecasting capabilities build reliability and flexibility into the sales process. Probability-based forecasting
offers weighted measurement of pending opportunities, quotes and orders, with the ability to make necessary
adjustments as deals progress.

NetSuite CRM+ also provides a system of checks and balances that triangulates the sales forecast into a single
dashboard view. A unique "mood ring" and forecast override feature allows sales reps and managers to make more
realistic predictions. You'll stay current with instantaneous, real-time insight into sales opportunities and how they will
impact your monthly and quarterly targets.

Benefits

• Make sales more predictable with real-time forecasting and a system of checks and balances that triangulates the
sales forecast

• Fine-tune forecast accuracy by creating forecast categories and entering a sales range for each open deal

• Use "mood ring" forecast overrides to overcome inaccurate sales process probability logic, sales rep sandbagging,
and other dynamic challenges that cloud sales forecasting

• Stay current with up-to-the-minute forecast and sales results on your dashboard, as well as real-time key
performance indicators (KPIs) and graphical report snapshots

• Effectively manage sales teams with flexible, hierarchical sales management portlets

• Get true forecast visibility—not just pipeline—with NetSuite's integrated order management, which includes actual
sales and projections of recurring revenue in forecasts.

Highlights

• Calculated Forecast: Forecasting tools in NetSuite CRM+ display all opportunities, quotes and orders, including
such key information as the projected amount, probability of close and weighted amount for each of these
transactions. Opportunities, quotes and estimates include a forecast category that allows users to categorize the
transaction appropriately as low, commit or upside; they can also adjust categories according to your business
conventions. Corresponding amounts are calculated into the forecast, providing sales managers with the sales
reps' most accurate forecast for that deal.

• "Mood Ring" Forecast: Sales people generally have a number in mind for what they "believe" they will close in a
given sales period. Forecasting tools in NetSuite CRM+ allow this "mood ring" prediction to be captured as an
override, without tying the forecasted number to any specific opportunities or quotes, so there is clear visibility
throughout the sales organization. The mood ring forecast applies to each management level, allowing sales
managers to override the forecast as entered.

• Multiple Forecasts: Many businesses manage sales with multiple definitions of each sale—by orders, bookings,
billings, and so on. NetSuite provides alternate sales amount functionality (ASA) that allows for the tracking of
multiple quotas and multiple forecasts, as well as the associated commission plans

Accounting and Finance

Economics (GCSE)
Economics (AS/A2)
EBusiness / E-
Commerce
English
History
ICT
Law
Marketing
People & Organisations
Politics
Production & Operations
Religious Studies
Sociology
Strategy
•
•
•
• sales forecasting
• Introduction
• Sales forecasting is a difficult area of management. Most managers believe they are good at forecasting. However,
forecasts made usually turn out to be wrong! Marketers argue about whether sales forecasting is a science or an art. The
short answer is that it is a bit of both.
• Reasons for undertaking sales forecasts
• Businesses are forced to look well ahead in order to plan their investments, launch new products, decide when to close or
withdraw products and so on. The sales forecasting process is a critical one for most businesses. Key decisions that are
derived from a sales forecast include:
• - Employment levels required
- Promotional mix
- Investment in production capacity
• Types of forecasting
• There are two major types of forecasting, which can be broadly described as macro and micro:
• Macro forecasting is concerned with forecasting markets in total. This is about determining the existing level of Market
Demand and considering what will happen to market demand in the future.
• Micro forecasting is concerned with detailed unit sales forecasts. This is about determining a product’s market share in a
particular industry and considering what will happen to that market share in the future.
• The selection of which type of forecasting to use depends on several factors:
• (1) The degree of accuracy required – if the decisions that are to be made on the basis of the sales forecast have high
risks attached to them, then it stands to reason that the forecast should be prepared as accurately as possible. However,
this involves more cost
• (2) The availability of data and information - in some markets there is a wealth of available sales information (e.g.
clothing retail, food retailing, holidays); in others it is hard to find reliable, up-to-date information
• (3) The time horizon that the sales forecast is intended to cover. For example, are we forecasting next weeks’ sales, or
are we trying to forecast what will happen to the overall size of the market in the next five years?
• (4) The position of the products in its life cycle. For example, for products at the “introductory” stage of the product
life cycle, less sales data and information may be available than for products at the “maturity” stage when time series
can be a useful forecasting method.
• Creating the Sales Forecast for a Product
• The first stage in creating the sales forecast is to estimate Market Demand.
• Definition:
Market Demand for a product is the total volume that would be bought by a defined customer group, in a defined
geographical area, in a defined time period, in a given marketing environment. This is sometimes referred to as
the Market Demand Curve.
• For example, consider the UK Overseas Mass Market Package Holiday Industry. What is Market Demand?
• Using the definition above, market demand can be defined as:
• Defined Customer Group: Customers Who Buy an Air-Inclusive Package Holiday
Defined Geographical Area: Customers in the UK
Defined Time Period: A calendar year
Defined Marketing Environment: Strong consumer spending in the UK but overseas holidays affected by concerns over
international terrorism
• Recent data for the UK Overseas Mass Market Package Holiday market suggests that market demand can be calculated as
follows:
• Number of Customers in the UK: 17.5 million per calendar year
Average Selling Price per Holiday: £450
Estimate of market demand: £7.9 billion (customers x average price)
• Stage two in the forecast is to estimate Company Demand
• Company demand is the company’s share of market demand.
• This can be expressed as a formula:
• Company Demand = Market Demand v Company’s Market Share
• For example, taking our package holiday market example; the company demand for First Choice Holidays in this market
can be calculated as follows:
• First Choice Holidays Demand = £7.9 billion x 15% Market Share = £1.2 billion
• A company’s share of market demand depends on how its products, services, prices, brands and so on are perceived
relative to the competitors. All other things being equal, the company’s market share will depend on the size and
effectiveness of its marketing spending relative to competitors.
• Step Three is then to develop the Sales Forecast
• The Sales Forecast is the expected level of company sales based on a chosen marketing plan and an assumed marketing
environment.
• Note that the Sales Forecast is not necessarily the same as a “sales target” or a “sales budget”.
• A sales target (or goal) is set for the sales force as a way of defining and encouraging sales effort. Sales targets are often
set some way higher than estimated sales to “stretch” the efforts of the sales force.
• A sales budget is a more conservative estimate of the expected volume of sales. It is primarily used for making current
purchasing, production and cash-flow decisions. Sales budgets need to take into account the risks involved in sales
forecasting. They are, therefore, generally set lower than the sales forecast.
• Obtaining information on existing market demand
• As a starting point for estimating market demand, a company needs to know the actual industry sales taking place in the
market. This involves identifying its competitors and estimating their sales.
• An industry trade association will often collect and publish (sometime only to members) total industry sales, although
rarely listing individual company sales separately. By using this information, each company can evaluate its performance
against the whole market.
• This is an important piece of analysis. Say, for example, that Company A has sales that are rising at 10% per year.
However, it finds out that overall industry sales are rising by 15% per year. This must mean that Company A is losing
market share – its relative standing in the industry.
• Another way to estimate sales is to buy reports from a marketing research firm such as AC Neilsen, Mintel etc. These are
usually good sources of information for consumer markets – where retail sales can be tracked in great detail at the point
of sale. Such sources are less useful in industrial markets which usually rely on distributors.
• Estimating Future Demand
• So far we have identified how a company can determine the current position:
• Current Company Demand = Current Market Demand x Current Market Share
• How can future market demand and company demand be forecast?
• Very few products or services lend themselves to easy forecasting . These tend to involve a product whose absolute level
or trend of sales is fairly constant and where competition is either non-existent (e.g. monopolies such as public utilities)
or stable (pure oligopolies). In most markets, total demand and company demand are not stable – which makes good sales
forecasting a critical success factor.
• A common method of preparing a sales forecast has three stages:
• (1) Prepare a macroeconomic forecast – what will happen to overall economic activity in the relevant economies in
which a product is to be sold.
(2) Prepare an industry sales forecast – what will happen to overall sales in an industry based on the issues that
influence the macroeconomic forecast;
(3) Prepare a company sales forecast – based on what management expect to happen to the company’s market share
• Sales forecasts can be based on three types of information:
• (1) What customers say about their intentions to continue buying products in the industry
(2) What customers are actually doing in the market
(3) What customers have done in the past in the market
• There are many market research businesses that undertake surveys of customer intentions – and sell this information to
businesses that need the data for sales forecasting purposes. The value of a customer intention survey increases when
there are a relatively small number of customers, the cost of reaching them is small, and they have clear intentions. An
alternative way of measuring customer intentions is to sample the opinions of the sales force or to consult industry
experts
• Time Series Analysis
• Many businesses prepare their sales forecast on the basis of past sales.
• Time series analysis involves breaking past sales down into four components:
• (1) The trend: are sales growing, “flat-lining” or in decline?
(2) Seasonal or cyclical factors. Sales are affected by swings in general economic activity (e.g. increases in the disposable
income of consumers may lead to increase in sales for products in a particular industry). Seasonal and cyclical factors
occur in a regular pattern;
(3) Erratic events; these include strikes, fashion fads, war scares and other disturbances to the market which need to be
isolated from past sales data in order to be able to identify the more normal pattern of sales
(4) Responses: the results of particular measures that have been taken to increase sales (e.g. a major new advertising
campaign