Sales Forecasting is the projection of customer demand for the goods and services over a period of time. In other words, it is the process that involves the estimation of sales in a physical unit that a company expects within a plan period.
Importance of Sales Forecasting
Sales forecasting is a very important function for a manufacturing concern, since it is useful in following ways:
(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
Following factors should be considered while making the sales forecast:
To assess demand, it is the main factor to know about the existing and new competitors and their future programme, quality of their product, sales of their product. Opinion of the customers about the products of other competitors with reference to the product manufactured by the firm must also be considered.
Changes in Technology
With the advancement of technology, new products are coming in the market and the taste and the likings of the consumer’s changes with the advancement and change of technology.
When the government produces or purchases then depending upon the government policy and rules, the sales of the products are also affected.
Factors Related to the Concern Itself
These factors are related to the change in the capacity of the plant, change in price due to the change in expenditure, change in product mix etc.
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. Many firms manufacture on the order basis, but in general, every firm produces the material in advance to meet the future demand.
Types of Sales Forecasting
There are two types of forecasting:
- Short-term forecasting
- Long-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
- To adopt suitable production policy so that the problem of overproduction and short supply of raw material, machines etc. can be avoided.
- To reduce the cost of raw materials, machinery etc.
- To have proper control of inventory.
- To set the sales targets.
- To have proper controls.
- To arrange the financial requirements in advance to meet the demand.
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
- To plan for the new unit of production or expansion of existing unit to meet the demand.
- To plan the long-term financial requirements.
- To train the personnel so that man-power requirement can be met in future.
Elements of a Good Sales Forecasting
Following four elements are suggested for adopting a sales forecasting method:
The previous method must be checked for want of accuracy by observing that the predictions made in past are accurate or not.
The method must be simple and easily understandable. It should satisfy top management people.
For an undertaking, cost is a main factor so the method adopted should consider the minimum cost.
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
- State whether the forecasting is short-term or long term, its objectives, only for a single undertaking or for whole industry.
- Select a good method of forecasting.
- Select different variables which are affecting the forecasting.
- Gather data for different variables.
- Determine best possible relationship by some statistical method between different variables.
- Make forecast and interpret the result.
Following points must be made clear before making a forecast:
- Forecast must be made in terms of rupees of sale volume or in units.
- 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.
- Forecast for new product by month-wise, may be done either using other manufacturing concern’s data or by survey.
- 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. A typical example show how the product group is divided.