1.

2:MARKET ANALYSIS
1.2.1:Sales Forecasting
What is Sales Forecasting?
Meaning of Sales Forecasting
• Any forecast can be termed as an indicator of what is likely to happen in a
specified future time frame in a particular field. Therefore, the sales forecast
indicates as to how much of a particular product is likely to be sold in a specified
future period in a specified market at speci­fied price.
• Accurate sales forecasting is essential for a business house to enable it to
produce the re­quired quantity at the right time. Further, it makes the
arrangement in advance for raw mate­rials, equipment’s, labour etc. Some firms
manufacture on the order basis, but in general, firm produces the material in
advance to meet the future demand.
• Forecasting means estimation of quantity, type and quality of future work e.g.
sales. For any manufacturing concern it is very necessary to assess the market
trends sufficiently in ad­vance. This is a commitment on the part of sales
department and future planning of the entire concern depends on this forecast.
• The management of a firm is required to prepare its forecast of share of the
market that it can hope to capture over the period of forecasting. In other words,
sales forecast is an estimate of the sales potential of the firm in future. All plans
are based on the sales forecasts.
Meaning of Sales Forecasting
• This forecast helps the management in determining as to how much
revenue can be expected to be realised, how much to manufacture, and
what shall be the requirement of men, machine and money.
• Thus we can define sales forecasting as, estimation of type, quantity and
quality of future sales. Goal for the sales department is decided on the
basis of this forecast and these forecasts also help in planning future
development of the concern. The sales forecast forms a basis for
production targets.
• From above, looking to its importance, it is essential that sales forecast
must be accurate, simple, easy to understand and economical.
• Thus we can say that a sales forecast is an estimate of the amount of
sales for a specified future period under a proposed marketing plan or
programme. Sales forecast can also been defined as, an estimate of sales
in terms of money or physical units for a specified future period under a
proposed marketing plan or programme and under an assumed set of
economic and other forces outside the unit for which the forecast is made.
Importance of Sales Forecasting:
• (i) It helps to determine production volumes considering availability of
facilities, like equipment, capital, manpower, space etc.
• (ii) It forms a basis of sales budget, production budget natural budget etc.
• (iii) It helps in taking decision about the plant expansion and changes in
production mix or should it divert its resource for manufacturing other
products.
• (iv) It helps in deciding policies.
• (v) It facilitates in deciding the extent of advertising etc
• (vi) The sales forecast is a commitment on the part of the sales department
and it must be achieved during the given period.
• (vii) Sales forecast helps in preparing production and purchasing schedules.
• (viii) Accurate sales forecasting is a very good aid for the purpose of
decision making.
• (ix) It helps in guiding marketing, production and other business activities
for achieving these targets.
Factors Considered for Sales Forecasting:
• Competition
• Changes in Technology
• Government Action
• Factors Related to the firm itself
Elements of a Good Sales Forecasting:
• 1. Accuracy:
• The previous method must be checked for want of accuracy by
observing that the predictions made in past are accurate or not.
• 2. Simplicity:
• The method must be simple and easily understandable. It
should satisfy top management people.
• 3. Economy:
• For an undertaking, cost is a main factor so the method
adopted should consider the minimum cost.
• 4. Availability:
• The technique must be able to produce meaningful results
quickly. The technique which takes much time to produce
useful information is of no use.
Procedure of Making a Sales Forecast:
• 1. State whether the forecasting is short-term or long
term, its objectives, only for a single undertaking or for
whole industry.
• 2. Select a good method of forecasting.
• 3. Select different variables which are affecting the
forecasting.
• 4. Gather data for different variables.
• 5. Determine best possible relationship by some statistical
method between different variables.
• 6. Make forecast and interpret the result.
Following points must be made clear before
making a forecast:
• 1. Forecast must be made in terms of rupees of sale
volume or in units.
• 2. Forecast must be made on annual basis and then
further divided as requirement, i.e. by month-wise, week-
wise, or so on the basis of previous year’s records.
• 3. Forecast for new product by month-wise, may be done
either using other manufactur­ing concern’s data or by
survey.
• 4. Forecast must be made in terms of product groups and
broken for individual products, the division may be
according to the sizes, brands, cables, colours etc.
Uses of Sales Forecast:
• 1. Product Planning:
• From forecasts we find out which product is more
profitable and which should be manufactured and which
should be dropped.
• 2. Planning Expansions:
• Long range forecasts can predict future demand trends,
which will enable the planning for expansion of the
concern.
• 3. Financial Planning:
• Sales forecast permits an evaluation of expenses and
income etc.
Uses of Sales Forecast:
• 4. Inventory Control:
• It facilitates better planning and control over the
inventories.
• 5. Production Control:
• It will help in better production control, i.e. better use of
equipment’s, controls over-time of labour, better
deliveries, better control over work-in-progress in­
ventories.
• 6. Sales Planning:
• It helps in finding out which territory needs more attention.
Various sales programme can be reassessed looking to
their achievements.
Types of Sales Forecasting:
• There are two types of forecasting:
• 1. Short-term forecasting and
• 2. Long-term forecasting.
Short Term Forecasting
• This type of forecasting can be defined when it covers a period of three
months, six months or one year. Generally, the last one is most preferred.
The period is dependent upon the nature of business. If the demand
fluctuates from one month to another, forecasting may be done only for a
short period.
• Purpose of Short-Term Forecasting:
• 1. To adopt suitable production policy so that the problem of
overproduction and short supply of raw material, machines etc. can be
avoided.
• 2. To reduce the cost of raw materials, machinery etc.
• 3. To have proper control of inventory.
• 4. To set the sales targets.
• 5. To have proper controls.
• 6. To arrange the financial requirements in advance to meet the demand.
Long Term Forecasting
• The forecasting that covers a period of 5, 10 and even 20
years. The period here also de­pends upon the nature of
business, but beyond 12 years, the future is assumed as
uncertain. But in many industries like ship-building,
petroleum refinery, paper making industries, a long term
forecasting is needed as the total investment cost of
equipment is quite high.
• Purpose of Long-Term Forecasting:
• 1. To plan for the new unit of production or expansion of
existing unit to meet the demand.
• 2. To plan the long-term financial requirements.
• 3. To train the personnel so that man-power requirement can
be met in future.
 Moving
Qualitative Methods

Executive Average
s

Quantitative Methods
Opinion
Exponenti
al
Delphi Method
Smoothing
Decomposition

Sales Force Naive/Ratio

Composite Method
Regression
Survey of Buyers’ Analysis
Intentions
Econometric
Analysis
 In this method of forecasting, the views of
senior executives of the company are
obtained for forecasting sales.
The oldest, simplest and the most widely
used method.
Advantages:
Disadvantages
(i)Forecasting can be done (i) unspecific
quickly and easily.
(ii)Less expensive than other (ii) subjective
method.
(iii) Very popular (iii) Difficult to breakdown the
forecast into sub units
Video explanation about glimpse of Sales Forecasting

https://www.youtube.com/watch?v=fp-1_9mLlbc
Developed during late 1940’s
By Rand Corporation
Forecasts of experts are taken by a
coordinator separately, which are
summarized and informed to experts, who
again give their coordinator separately,
which are summarized and informed to
experts, who again give their opinions on
the same matter. This process is continued
till there is a near consensus.
 Advantages: Disadvantages
(i)Objective forecast is (i)Difficulty getting a
accurate. panel experts.

(ii)Useful foe (ii)Longer time for

technology, new getting consensus.
product, and industry
sales forecast.
(iii)Both long and short (iii) Break-down of
term forecasting forecast into products
possible. or territories is not
possible.
Each salesperson estimates how much
quantity or value each existing and
prospective consumer will buy of each of the
company’s product and services in his/her
territory.
 Advantages: Disadvantages
(i) Forecasting is don by a (i)Sales forecast are often
salespeople who are pessimistic or optimistic,
closest to the market.

(ii)Detailed sales estimate (ii)If sales forecast are used

broke down by customer, to set sales quotas, which are
product and territory are linked to incentive schemes,
possible. salespeople may deliberately
under estimate the demand.
(iii)Involvement of (iii)Many salespersons are
salespeople. not interested in sales
forecasting, and prefer to
spend time in the field
meeting sustomers.
Also called “market research” or “market
survey”.
In this method, existing and potential
costumers are asked about their likely
purchases of the company’s products and
services, during the forecast period.
 Advantages: Disadvantages
(i) Useful in forecasting (i) Difficulty getting a
sales for industrial panel experts.
products, consumer,
durables, and new
products.
(ii) It also gives customer’ (ii) Longer time for
reasons for buying or not getting consensus.
buying.

(iii) Relatively inexpensive (iii) Break-down of

and fast. forecast into products or
territories is not possible.
This is a forecasting method that
measures consumer acceptance of a new
product. This is be done by estimating the
sales or demand for a new product or
service in a representative small market,
which is extrapolated over the total
market to estimate the total demand for
the product.
1.Full-blown test markets
2.Controlled test marketing
3.Simulated test
marketing
Full-blown test markets
Buyer surveys are carried out to get information
about consumer attitude, usage and satisfaction
towards a new product.

Controlled test marketing

The company with a new products hires a
research firm and gets a panel of stores at specified
geographic locations.

Simulated test marketing

In this method, about 30-40 consumers are
selected, based on their brand familiarity and
preferences in a particular product category.
 Advantages: Disadvantages
(i) Their usefulness for (i) Chances of spoilages.
forecasting the sales
of new or modified
product.
(ii)In deciding whether the (ii)It is difficult for the
company should go company to wait to
ahead for a national measure test result.
launch of a new product
without spending huge
amount.
 In this method of forecasting, the moving
averages of the company sales of the
previous periods are calculated for
forecasting the sales of the future periods.
The formula used is:
Actual sales for past
3 or 6 years
Sales for next year =
Number of years
(3 or 6)
 Advantages: Disadvantages
(i) Relatively simple (i)Unable to predict a
method. downturn or upturn in the
market.

(ii) Easy to calculate (ii)Cannot predict long-

term sales forecast
accurately

(iii) Widely used for short (iii)Historical data is

term and medium term needed.
sales forecasts.
This is a forecasting method in which the
forecaster can allow sales in certain
periods to influence the sales forecast
more than the sales on other periods
By using a smoothing constant (L) in the
equation:
sales forecasts for next period =
(L) (actual sales this period) +
(1 – L) (this period’s sales forecast)
 Advantages: Disadvantages
(i) Simple to operate. (i) Arbitrary

(ii)Forecasters knowledge or (ii)Long term and new

intuition can be used in product forecasting
forecasting. are not possible.

(iii)Useful method when

sales date have a trend or a
seasonal pattern.

(iv)Immediate response to a
upturn or downturn in sales.
(v) Used by many firms.
This is one of the methods of sales
forecasting in which the company’s periods
of sales data are broken down (or
decomposed) into major components, such
as trends, cycle, seasonal, and erratic
events.
These components are then recombined
to forecast the sales for the future period.
 Advantages: Disadvantages
(i)Conceptually sound (i)Difficult and complex
method. statistical method are needed
to break down sales data into
various components.

(ii) Historical data is needed.

 it is a forecasting method, which is based on the
assumption that what happened in the immediate
past will continue to happen in the immediate
future.

The formula used is:

Sales for next year = Actual sales for this year X

Actual sales for this year

Actual sales for last year

 Advantages: Disadvantages
(i) Simple to calculate. (i)Cannot be used for
long-term and new
products.

(ii) Requires less data. (ii)Accuracy of sales

forecast would be less, if
past sales fluctuate
considerably.
(iii)Accuracy is good in
short-term forecast.
It is a statistical method of sales
forecasting that derives an equation based on
relationship between the company sales
(dependent variable, x) and independent
variables, or factors (y1, y2) which influence
the sales.

 Simple regression analysis

 Multiple regression analysis
 Advantages: Disadvantages
(i) High forecasting (i)Technically complex
accuracy

(ii) Objective method (ii)Expensive and time

consuming.

(iii) Can predict turning (iii)Use of computer and

points of the software packages
company’s sales. essential.
 This is another method of forecasting in
which many regression equations are built
to forecast industry sales, general
economic conditions, or future events with
the help of computer hardware and
software.
Advantages
Disadvantages
Accurate forecasts of Large volume of data is
economic conditions and required.
industry sales are
possible.
 Use Multiple Forecasting Methods
Identify Suitable Methods
Develop a Few Factors
Obtain a Range Factors
Use Computer Hardware and Software
https://www.youtube.com/watch?v=-f
gGGaBGt24
Limitations of Sales Forecast:
• 1. Fashion
• 2. Lack of Sales History
• 3. Psychological Factors
• 4. Other Reasons
It is the estimate of expected sales
volume and selling expenses for the
company’s products and services, for the
budget period.
The sales manager is responsible for
preparing three detailed budgets.
(i) Sales volume budget
(ii)Selling expense budget
(iii)administrative budget of the sales
department
(i) Sales Volume Budget
derived from the sales forecast, is
broken down into:
(a) Product-Wise Quantities
The average selling price per unit, and
sales revenue.
(b) Territory-Wise
Quantities to be sold and sales revenue
( c) Costumer-Wise and Salesperson-Wise
Sales volume quota during
yearly, quarterly and monthly
budget time.
(ii) Selling expense budget
includes expenditures for personal
selling activities.

(iii)Administrative budget of the sales

department
the budget should be include
operating expenses.
 Planning
Coordination
Control
Percentage of Sales Method
-multiplying the sales volume budget by
various percentages of each category of
expenses.
 Executive Judgement Method
uses judgement to decide the budgeted
selling expenses for each category.

 Objective and task Method

1. Look at the sales volume
objective
2.Task and action are decided that are
required and to be carried out.
3.Estimate the costs of carrying out
1.Review situation
2.Communication
3.Subordinates budgets
4.Approval of the sales
budgets
5.Other departments