Uses of Sales forecast, Methods of sales forecast

21/03/2020 3 By indiafreenotes

Future is uncertain. Man thinks about future. He may be a businessman, a broker, a manufacturer, a commission agent etc. All guess about the future in their respective field of interest. We try to know, through a clear imagination, what will be happening in the near future after a weak, month or year. It can be called forecast or prediction. The process of forecasting is based on reliable data of past and present. Forecasting is not new, as it has been practiced from time immemorial.

Forecasting is one of the important aspects of administration. The comer-stone of successful marketing planning is the measurement and forecasting to market demand. According to American Marketing Association, “Sales forecast is an estimate of Sales, in monetary or physical units, for a specified future period under a proposed business plan or programme and under an assumed set of economic and other forces outside the unit for which the forecast is made.”

A sales forecast is an estimation of sales volume that a company can expect to attain within the plan period. A sales forecast is not just a sales predicting. It is the act of matching opportunities with the marketing efforts. Sales forecasting is the determination of a firm’s share in the market under a specified future. Thus sales forecasting shows the probable volume of sales.

“Sales forecast is an estimate of sales during a specified future period, whose estimate is tied to a proposed marketing plan and which assumes a particular state of uncontrollable and competitive forces.” —Candiff and Still

Factors influencing a Sales Forecasting:

A sales manager should consider all the factors affecting the sales, while predicting the firm’s sales in the market.

An accurate sales forecast can be made, if the following factors are considered carefully:

  1. General Economic Condition:

It is essential to consider all economic conditions relating to the firm and the consumers. The forecaster must see the general economic trend-inflation or deflation, which affect the business favourably or adversely. A thorough knowledge of the economic, political and the general trend of the business facilitate to build a forecast more accurately. Past behaviour of market, national income, disposable personal income, consuming habits of the customers etc., affect the estimation to a great extent.

  1. Consumers:

Products like, wearing apparel, luxurious goods, furniture, vehicles; the size of population by its composition-customers by age, sex, type, economic condition etc., have an important role. And trend of fashions, religious habits, social group influences etc., also carry weights.

  1. Industrial Behaviours:

Markets are full of similar products manufactured by different firms, which compete among themselves to increase the sales. As such, the pricing policy, design, advanced technological improvements, promotional activities etc., of similar industries must be carefully observed. A new firm may come up with products to the markets and naturally affect the market share of the existing firms. Unstable conditions—industrial unrest, government control through rules and regulations, improper availability of raw materials etc., directly affect the production, sales and profits.

  1. Changes within Firm:

Future sales are greatly affected by the changes in pricing, advertising policy, quality of products etc. A careful study in relation to the changes on the sales volume may be studied carefully. Sales can be increased by price cut, enhancing advertising policies, increased sales promotions, concessions to customers etc.

  1. Period:

The required information must be collected on the basis of period—short run, medium run or long run forecasts.

Importance of Sales Forecasting:

  1. Supply and demand for the products can easily be adjusted, by overcoming temporary demand, in the light of the anticipated estimate; and regular supply is facilitated.
  2. A good inventory control is advantageously benefited by avoiding the weakness of under stocking and overstocking.
  3. Allocation and reallocation of sales territories are facilitated.
  4. It is a forward planner as all other requirements of raw materials, labour, plant layout, financial needs, warehousing, transport facility etc., depend in accordance with the sales volume expected in advance.
  5. Sales opportunities are searched out on the basis of forecast; mid thus discovery of selling success is made.
  6. It is a gear, by which all other activities are controlled as a basis of forecasting.
  7. Advertisement programmes are beneficially adjusted with full advantage to the firm.
  8. It is an indicator to the department of finance as to how much and when finance is needed; and it helps to overcome difficult situations.
  9. It is a measuring rod by which the efficiency of the sales personnel or the sales department, as a whole, can be measured.
  10. Sales personnel and sales quotas are also regularized-increasing or decreasing-by knowing the sales volume, in advance.
  11. It regularizes productions through the vision of sales forecast and avoids overtime at high premium rates. It also reduces idle time in manufacturing.
  12. As is the sales forecast, so is the progress of the firm. The master plan or budget of a firm is based on forecasts. “The act of forecasting is of great benefit to all who take part in the process, and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a unified front, an understanding of the reasons for decisions, and a broadened outlook.”

Types of Sales Forecasting:

The Economic Forecast:

This type of forecast is important to understand the general economic trend through a careful study of Five Year Plans, Gross national products. National income, Government expenditure, Unemployment, Consumer spending habits etc. This is in order to have an accurate forecast. Big companies, in India, adopt this method.

The Industry Forecast:

The future market demand is calculated through industrial forecast or market forecast. The expected sales forecasts of all the industries, in the same line of business are combined. Market demand may be affected by controllable-price, distribution, promotion, etc., and uncontrollable-demographic, economic, political, technological development, cultural activities etc. The executive must take into account all these conditions while forecasting.

The Company Forecast:

The third step goes to the firm concerned to look into the market share, for which forecast is to be made. By considering both controllable and uncontrollable, based on chosen marketing plans within the firm, with that of other industries, steps are taken in formulating forecasts.

There are three classes of sales forecasts:

  1. Short-run Forecast:

It is also known as operating forecast, covering a maximum of one year or it may be half-yearly, quarterly, monthly and even weekly. This type of forecasting can be advantageously utilized for estimating stock requirements, providing working capital, establishing sales quotas, fast moving factors. It facilitates the management to improve and co-ordinate the policies and practice of marketing-production, inventory, purchasing, financing etc. Short-run forecast is preferred to all types and brings more benefits than other types.

  1. Medium-run Forecast:

This type of forecast may cover from more than one year to two or four years. This helps the management to estimate probable profit and control over budgets, expenditure, production etc. Factors-price trend, tax policies, institutional credit etc., are specially considered for a good forecast.

  1. Long-run Forecast:

This type of forecast may cover one year to five years, depending on the nature of the firm. Seasonal changes are not considered. The forecaster takes into account the population changes, competition changes, economic depression or boom, inventions etc. This type is good for adding new products and dropping old ones.

Limitations of Sales Forecast:

In certain cases forecast may become inaccurate. The failure may be due to the following factors:

  1. Fashion:

Changes are throughout. Present style may change any time. It is difficult to say as to when a new fashion will be adopted by the consumers and how long it will be accepted by the buyers. If our product is similar to the fashion and is popular, we are able to have the best result; and if our products are not in accordance with the fashion, then sales will be affected.

  1. Lack of Sales History:

A sales history or past records are essential for a sound forecast plan. If the past data are not available, then forecast is made on guess-work, without a base. Mainly a new product has no sales history and forecast made on guess may be a failure.

  1. Psychological Factors:

Consumers’ attitude may change at any time. The forecaster may not be able to predict exactly the behaviour of consumers. Certain market environments are quick in action. Even rumours can affect market variables. For instance, when we use a particular brand of soap, it may generate itching feeling on a few people and if the news spread among the public, sales will be seriously affected.

  1. Other Reasons:

It is possible that the growth may not remain uniform. It may decline or be stationary. The economic condition of a country may not be favourable to the business activities-policies of the government, imposition of controls etc. It may affect the sales.

The methods of forecasting discussed above have respective merits and demerits. No single method may be suitable. Therefore, a combination method is suitable and may give a good result. The forecaster must be cautious while drawing decisions on sales forecast. Periodical review and revision of sales forecast may be done, in the light of performance. A method which is quick, less costly and more accurate may be adopted.