What Is Sales Forecasting Marketing Essay

Forecasting is a little more scientific than looking into the crystal ball . The scientific basis of forecasting lies in studying past , present and future trends , present and future actions and their effects . What happened in the past is relevant to what is happening now and what could happen in the future .

Forecasting is defined as the process of making statements about the events whose actual outcomes have not yet been observed . A common example might be the estimation of some variable of interest at some specified future date . Prediction is similar , but it is more general term. Both might refer to formal statistical methods employing  the time series , cross sectional or longitudinal data and alternatively to less formal judgemental methods . Usage can differ between areas of application – for example in hydrology , the terms ” forecast ” and “forecasting” are sometimes reserved for the estimation of values at certain specific future times , while the term ” prediction ” is used for more general estimates , such as the number of times the floods will occur over a long period .

WHAT IS SALES FORECASTING ?

SALES FORCATING :

Sales forecasting is estimating what a company’s future sales are likely to be , based on the sales records as well as the market research . Information used for sales forecasting must be well organized and may include information on the competition and the statistics that affect the businesses customer base . Companies conduct sales forecasting in hopes of identifying the patterns so that the revenue and the  cash flow can be maximized .

Sales forecasting is a difficult area of management . Most managers believe that 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. Sales forecast should be conducted regularly and all the forecasting results need to be measured , so that the future methods can be adjusted if necessary .

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 can be used for long term forecast period and is good for dealing with growth into new markets or new products .

Basically sales forecasting is analyzing all the parts of a business from total inventory to the strengths and weaknesses of sales people . Managers must think about changes in customer sales or other changes that could affect the forecasting figures . They must be competitive when they are assessing the competition and how they can surpass the competition to better meet the needs of the target market .

IMPORTANCE OF SALES FORCASTING

Sales forecasting is the basis of all the business activities . All the business activities may it be a sales related matter , production related matter , finance , advertising etc depend on sales forecasting . Any business firm starts its plan with sales forecasting . Sales forecasting is a self assessment tool for a company . A sales forecast reports , graphs and analyzes the pulse of any business . It is a vital basis for a company’s budget . The future direction of the company depends on the sales forecasting . 

Sales are the lifeblood of the business . It’s what helps you pay employees , cover operating expenses , buy more inventory , market new products and attract more investors . Sales forecasting is a crucial part of the financial planning of the business . It’s a self assessment tool that uses the past and the current sales statistics to intelligently predict the future performance .

Sales forecasts are also an important part of starting a new business . Almost all new businesses need loans or start up capital to purchase everything necessary to get off the ground – office space , equipment , inventory , employee salaries and marketing . You can’t just walk into a bank with a bright idea and lots of enthusiasm . You need to show them numbers that prove your business is viable . In other words , you need a business plan .

The importance of Sales forecasting can be stated as follows :

1 . Overstocking and the under stocking of materials can be maintained by a good inventory control.

2 . With the help of sales forecasting , sales opportunities can be found out on the basis of the forecast .

3 . All the activities in an organization , are controlled on the basis of forecasting .

4 . Advertising and sales promotion expenses are based on sales forecasting .

5 . Sales forecasting is also important in the field of personnel department . The number of sales persons , executives etc can be increased or decreased on the basis of sales forecasting .

6 . Sales forecasting is the basis for financial Planning .

7 . In the field of production , with the help of sales forecasting , producer is able to adjust his production schedules and avoid idle time which leads to efficiency .

8 . Supply and demand of the products can be easily adjusted . 

9 . It helps in knowing when and how much to buy .

10 . It helps in the product mix decisions .

SALES FORECASTING ON THE BASIS OF PAST

Many businesses prepare their sales forecast on the basis of their past sales .

Past years Sales forecasting is done with the help of Time series analysis .

Time series analysis involves the breaking of past sales down into the four components :

The trend – are the sales growing , flat lining or are in decline !

Seasonal or cyclical factors – Sales are affected by the swings in the general economic activity . Seasonal and cyclical factors occur in a regular pattern .

Erratic events – these include strikes , fashion fads , war scares and other disturbances to the market , which need to be isolated from the past sales data in order to be able to identify the more normal pattern of the sales .

Responses – the results of the particular measures that have been taken to increase the sales (e.g. a major new advertising campaign) .

Using the time series analysis to prepare an effective sales forecast requires the management to :

Smooth out the erratic factors .

Adjust for the seasonal variation .

Identify and estimate the effect of the specific marketing responses .

SALES FORECASTING ON THE BASIS OF PRESENT MARKET

As a starting point for estimating the market demand , a company needs to know the actual industry sales that is taking place in the market . This involves identifying its competitors and estimating their sales . An industry trade association will often collect and publish the total industry sales , although rarely listing the individual company sales separately .

By using this information , each company can easily 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 the rate of 10% per year . However , it finds out that the overall industry sales are rising by the rate of 15% per year . This must mean that Company A is losing the market share , its relative standing in the industry .

Another way to estimate the sales is to buy the reports from a marketing research firm such as AC Neilsen , Mintel etc . These are usually good sources of information for the consumer markets – where the retail sales can be tracked in great detail at the point of sale . Such sources are less useful in the industrial markets which usually rely on the distributors.

SALES FORECASTING FOR FUTURE MARKET

So far we have identified that how a company can determine the current position .

How can the future market demand and the company demand be forecast ?

Very few products or the services lend themselves to easy forecasting . These tend to involve a product whose absolute level or the trend of sales is fairly constant and where the competition is either non-existent ( e.g. monopolies such as public utilities ) or stable ( pure oligopolies ) . In most of the markets , the total demand and company demand are not stable – which makes the good sales forecasting a critical success factor .

A common method of preparing the sales forecast has three stages :

Prepare the macroeconomic forecast  – what will happen to overall economic activity in the relevant economies in which a product is to be sold .

Prepare an industry sales forecast  – what will happen to overall sales in an industry based on the issues that influence the macroeconomic forecast .

Prepare a company sales forecast – based on what management expect to happen to the company’s market share .

Sales forecasts can be based on the following three types of information :

What the customers say about their intentions to continue buying products in the industry .

What the customers are actually doing in the market .

What the customers have done in the past in the market .

There are many market research businesses that undertake surveys of the customer intentions and sell this information to the businesses that need the data for sales forecasting purposes . The value of the customer intention survey increases when there are a relatively small number of customers , the cost of reaching them is small and they have the clear intentions . An alternative way of measuring the customer intentions is to sample the opinions of the sales force or to the consult industry experts .