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Amity Business School

Amity Business School

Module II- Sales Forecasting


Sales Forecast
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Sales information- Like the Circulatory system of human


body
Used to forecast market demand
A forecast is the estimated rupee or unit sales for a specific
time period based on companys market plan & assumed
market environment.
Sales manager is primarily interested in the market
demand!
Factors considered Amity Business School

Total industry sales, market share of the firm,, growth


rate in the category & the firms product line &
individual products performance in the market.
Internal factors new products, new uses of older
products, lower prices etc.
External factors natural/man-made issues.
Technology
Elasticity of good/service in question
Laws and regulations
Social factors
Demographical trends
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Market Demand Function


D= f(P, I, S,T, A)
Linear Form of a demand equation:-
Qd= B+aP
Market Demand Forecasting
Most complex managerial function
Method of forecasting depends upon nature of
product, PLC stage, degree of innovation,
consumption choice, market penetration levels
etc.eg Forecasting for FMCG vs Consumer
durables
Contd. Amity Business School

Forecasting has to be done for the product as


well as the firm
Can help in determining the proper product mix
demand
PLC- Growth or maturity?
Frequency of innovations in the category-use of
trend projections or extrapolations applicable???
Forecasting for a developing market or
developed market
Use of MDSS
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Importance of sales forecasting


Key factor in operational planning and
therefore affects production scheduling,
purchase of raw materials, setting labour needs
etc.
Impacts sales force planning, determination of
sales budget, sales quotas & finally their
compensation
Also helps in deciding debt / cash flow reqd
for a firm
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The different estimates


Market Potential the total industry wide sales expected
for a product for a period of time.
Sales Potential the maximum market share the company
can reasonably expect to achieve.
Market potential & sales potential should be equal in case of
monopoly
Sales Forecast an estimate of sales that an individual
firm expects to achieve during a specified forthcoming time
period, in a stated market & under a proposed marketing plan.
Sales forecast is typically less than the sales potential for
different reasons.
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Demand Vs. Sales

A companys sales potential is a function of


the market potential (demand) and the
companys ability to capture a share of that
market.
External factors, though, can favor one
competitor over the other.
Market Forecasting Process
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Determine
Forecast independent & Develop forecast
objectives dependent procedure
variables

Comprehend
Collect, collate, Select forecast
total forecast
analyse data analysis method
procedure

Present all the


Make & finalise Evaluate results
assumptions
the forecast against forecast
about data
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Approaches to sales forecasting

Break down method


Build up method
Steps in break down method
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General environment
forecast

Industry sales
forecast

Company sales
forecast

Sales forecast for


the product line

Individual product
forecast
Forecasting Methods Amity Business School

Survey methods /Qualitative Methods


Executive opinion
Sales force composite
Buyers intentions
Mathematical methods/ Quantitative methods
Moving average models
Exponential smoothing models
Regression models

Operational methods/ Quantitative methods


Test markets
must-do calculations
Capacity-based calculations
Survey Methods/ Qualitative Methods
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Executive opinion obtaining the views of top


executives regarding future sales with/without facts.
Experts opinion Opinion of market professionals,
distributors /dealers & professional bodies
Delphi method- Group of experts & a delphi
coordinator. Aims at gradual reduction of variation in
forecasts by getting a consensus . Still most widely used
Sales force composite often tagged as the grass-roots
approach. Collect an estimate from each salesperson of
the product/services theyre expected to sell in the
forecast period. Estimate aggregated to yield overall
sales forecast.Salesperson tends to be overly
optimistic/or overly pessimistic, ignorant.
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Survey of buyers intentions


- Least sophisticated method but requires careful attention
to wording , sampling,methods of selection
- information directly obtained from actual purchasers &
decision makers.
-However its time consuming & costly and are often
hazardous undertakings
- Industrial marketers use this approach more than consumer
goods marketers. Also called build to order method,
forecast obtained based on demand patterns of B2Bbuyers
Historical Analogy method
Product/ service has no past data, historical analogy b/w two
productsusing historical data of earlier product
Quantitative Methods
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Test Marketing
-Most popular/accurate method for measuring
consumers acceptance of new products
- A pilot is conducted by establishing test territory,
channel and personnel. Based on the success of
this pilot, market expansion can be planned.
- Use of test market & controlmarket
- Cannot be applied for products which require
extensive investment in fixed assets before launch.
- Offers opportunity to change features & promotional
tools based on test market results
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Time Series Analysis


- Relevant past data collected, makes forecast
based on past patterns
- Useful for markets which are somehow stable,
marked with least erratic behaviour
- Four components of the past data for TSA- trend,
seasonality, cyclicality & irregularity
- Most popular TSA methods are:- Trend
Projections, Free hand or graphic method,
Moving Averages method, Exponential
smoothing & regression method
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Trend Projections
-Basic Assumption is what has happened in the
immediate past will continue to occur in future
-use of graphic curve fitting or by statistical curve
fitting
- Naive Method trend projection formula
Sales( for period t)=Sales ( for period t+1)
- Naive Method adjusted to account for change in
rate of sales level
Sales (t+1) = Sales(t)*Sales(t)
Sales(t-1)
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Free hand / Period Sales


Cumulative
sales
sales
forecast
graphic method
1 16,250
2 17,000
Moving average : 3 20000 53,250
Salest+1 =1/n(salest+salest- 4 16000 53,000 17750

1+.salest-n)
17666.6666
5 15000 51,000 7
6 17250 48,250 17000
16083.3333
7 18000 50,250 3
8 20000 55,250 16750
9 18417
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Exponential Smoothing
Similar to moving average method
Allowed to vary weights assigned to past data
Weights most recent data more strongly
Reacts more to recent changes
Used to forecast only one period in future
Widely used, accurate method
Smoothing constant chosen b/w 0& 1
Primary disadvantage does not provide
accurate forecasts for a significant trend
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Continued
F(t +1) = a D(t) + (1 - a)F(t)
where:
F(t +1) = forecast for next period
D(t) = actual demand/sales for present
period
F(t) = previously determined forecast
for present period
a = weighting factor, smoothing constant
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Effect of Smoothing Constant


0.0 a 1.0. If the sales data changes slowly, a
should be small. If the sales data changes rapidly a
should be large.
If a = 0.20, then F(t +1) = 0.20 D(t) + 0.80 F(t)
If a = 0, then F(t +1) = 0 D(t) + 1 F(t) 0 = Ft
Forecast does not reflect recent data
If a= 1, then F(t +1) = 1 D(t) + 0 F(t) = Dt
Forecast based only on most recent data
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Exponential Smoothing (a=0.30)


F2 = aD1 + (1 - a)F1
PERIOD MONTH DEMAND = (0.30)(37) + (0.70)(37)
= 37
1 Jan 37
F3 = aD2 + (1 - a)F2
2 Feb 40
= (0.30)(40) + (0.70)(37)
3 Mar 41
= 37.9
4 Apr 37
F13 = aD12 + (1 - a)F12
5 May 45
= (0.30)(54) + (0.70)(50.84)
6 Jun 50
= 51.79
7 Jul 43
8 Aug 47
9 Sep 56
10 Oct 52
11 Nov 55
12 Dec 54
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Regression Models
Correlation
a measure of the strength of the relationship between
independent and dependent variables
Linear regression
a mathematical technique that relates a dependent
variable to an independent variable in the form of a linear
equation
The independent variables are developed through
correlation analysis
Simple regression models use only one whereas multiple
regression models use more than one independent
variable
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Linear Regression
Y = a+bx xy - nxy
Where: b =
x2 - nx2
y = dependent
a = y-bx
variable( Sales
forecast) where
a= intercept n = number of periods
b= slope
x = x = mean of the x values
X=independent n
variable
y = y = mean of the y values
n
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Example Regression model


x(PERIOD) y(DEMAND) xy x2
1 73 73 1
2 40 80 4
3 41 123 9
4 37 148 16
5 45 225 25
6 50 300 36
7 43 301 49
8 47 376 64
9 56 504 81
10 52 520 100
11 55 605 121
12 54 648 144
78 557 3903 650
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Continued
78
x = = 6.5
12
593
y = = 49.41
12
xy - nxy 3903 - (12)(6.5)(49.41)
b = =
x - nx
2 2
650 - 12(6.5)2

a = y - bx
= 49.41 - (1.72)(6.5) = 38.23
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Operational Methods
Must Do Forecasts
Often management forecasts what volume of
sales it needs to accomplish certain goals. This
is the must-do forecasted sales in order to
generate sufficient cash to cover fixed and
variable costs.
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Capacity based forecasts


Sometimes, whatever the firm produces can be
sold. Thus, its capacity becomes its forecast.
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Guiding principles of forecasting


Understand
maths
& statistics

Use minimum/ Minimize no. of


maximum technique market factors
Forecasting
principles

Fit the method to


the product/service
Recognise situation
limits
Use more than
one method
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Sales Budget Vs. Sales Forecast


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.
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Determining sales budget


Primarily by 2 methods :-
Budgeting by percentage of sales method
Budgeting by the objective & task method.
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Budgets for sales department activities


Sales executives formulate 3 basic budgets :-
Sales budget
is the revenue or unit volume anticipated from sales of the firms products
Selling expense budget
anticipates the various expenditures for personal selling activities- salaries,
commissions, expenses for sales force, must be closely co ordinated with
the sales budget
Sales department administrative budget
make budgetary provisions for office workers, operating expenses like
supplies , rent, heat power, light, office equipment, general overhead
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Sales budget is a projection of of what a given sales


program means in terms of sales volume, selling
expenses & net profits
Sales forecast is the source for sales volume
portion of sales budget
Purposes of sales budget
Mechanism of control- yardstick against which performance is
measured in terms of sales volume, selling expenses & net
profits
Instrument of planning- During thee budgeting process
planners determine ways& means for the business to get
from where it is & where it wants to go
- Calculation of expenses to convert forecast into actual sales
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Form & content


- Completed sales budget is a statement of
projected sales revenues & selling
expenses
- Display of sales in terms of each product,
territory, quarters / months, & by class of
account
Estimating budgeted selling expenses
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Objective is optimum & not maximum


profit in the short run
Both immediate & long run sales plans are
taken into account
Mgmt expresses its plan for the
forthcoming period in terms of required
activities which are then converted into
dollar /rupee estimates for various items of
selling expenses
For budgeting items of selling expense
mgmt:-
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i) Estimates volume of performance of activities


ii) Multiplies this by the cost of performing this
activity
Use of standard costs
-Standard cost is a predetermined cost for having
a standard employee perform under standard
conditions one measurable unit of activity
-Comparison of current cost against standard
costs
- Analysis of changed conditions on historical cost
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Other estimating methods


- Computation of average cost per unit sold
- Multiplied by forecasted sales
- Some companies build up their estimates
- Some adjust average cost for changes in
strength of competition, general business
conditions, inflation rate etc
Budgetary Procedure Amity Business School

Begins in the sales dept but impacts other dept


as well
Production dept mainly interested in unit sales
whereas finance dept in dollar/rupee sales
Planning styles & budgetary Process
Top Down Theory X
Bottom up- Theory Y
- Most budgetary experts recommend bottom up
approach
- Should be as much horizontal as a vertical
concept
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Actual Budgetary procedure

Handling Competition for available funds


within the mktg division
selling the sales budget to the top mgmt
use the budget for control process
Effect of errors in budgetary estimates
Flexibility in budgeting