Sales forecasting

When you are in a buyer driven market, Sales Forecasting is a must to avoid
inventory surplus or deficit. Companies can have a short term (2-3 months),
medium term (1 year) and long term forecast (multiple years, depending on
the industry).

In the medium to long term, it becomes more important to judge the sales trend,
apart from other macroeconomic trends, to ensure that the company is in a
position to meet demand as efficiently as possible
 Sales Forecasting

Relevance:
1) Production department for production planning and coordination with the
sales team
2) Purchase department must know about the forecast to ensure it can plan
its purchases in advance
3) HR department can use the forecast for its manpower planning
4) The accounting department needs to plan for future cash inflows as well
as plan for new equipment needed
5) R&D people must be aware of product life cycle in the market so they can
make innovations in advance
6) Marketers need to have a forecast to plan their activity accordingly in
coordination with the sales team
Sales Forecasting
Market Potential: An estimation of the maximum possible sales opportunities
present in a particular market and open to all players for a given
product/service during a stated time period

Sales Potential: It is an estimate of the maximum possible sales opportunities

present in a particular market available to a specified company in a
particular product category during the stated future period

Sales Forecast: Estimate of the number of sales on rupees or physical units, in

a future period under a particular marketing program and an assumed set of
economic conditions and other external factors
Sales forecasting
Analysing market potential: First of all it is important to analyse the current and
prospective buyers/users of the product/service
In B2C scenarios you need to do extensive STP to ascertain the target customers

In a B2B scenario companies have to be classified by size, location, type of industry, growth
rates, buying process, etc.

Companies also need to study market motivation, i.e. why people may/may not buy a
particular product or service. This helps in strategising the sales approach and also how
companies may want to promote the product.

Finally, companies need to study market factors associated with the products demand to
arrive at the market potential estimate…
Sales forecasting
Market index: A numerical expression indicating the degree to which one or
more market factors associated with a given product’s demand is present in
a given market segment

Sales forecasts take the sales potential as a starting point and then adjust for
various company constraints like production, distribution/sales force or
company policies like focus on profits and not sales
Sales forecasting
Commonly used sales forecasting methods are as follows:

1) Jury of executive opinion: In this method, high ranking executives estimate

probable sales and then an average estimate is calculated. Its benefits are:
b) Quick and easy method
c) Pools opinion of experienced, well informed people
d) For a young company, it may be the only way
e) When statistics are missing, there can be no other option

The Delphi technique is a variation, where questionnaires are given to experts

and new questionnaires formed based on responses
Sales forecasting
2) Poll of sales force opinion: Individual sales personnel forecast sales for
their territories and these are pooled and modified as considered
appropriate by the management

• The benefit is that sales force knows ground reality and would be better
prepared to achieve the target they set.
• However, they are often too close to the trees to see the forest.
• A key question is how do you mix newcomer’s projection with a veteran
• Makes more sense as a method to cross check other methods used
Sales forecasting
3) Projection of past sales: Set the sales forecast as per past growth
trend; which can be the previous year or a moving average; it would be
more appropriate for industries where growth rates are relatively stable

Sales Sn+1 = Sn x (Sn/ Sn-1)

4) Time series analysis: Analyse four sales variations in historical data:

long term trends, cyclical changes, seasonal variations and irregular
fluctuations and then a mathematical model is made describing the past
behaviour of these variables and used to call on what can be turns for
better or worse
Sales forecasting
5) Exponential Smoothing: It is defined as an average that represents a
weighted sum on all past numbers in a time series with heaviest weight
placed on the most recent data.

6) Survey of customer’s buying plans: This can help ascertain what can
be the potential demand for the upcoming period

Based on the sales forecasting, the company can then set its final volume
objectives