Sales Forecast A sales forecast is the estimated dollar or unit sales for a specific future time period based
on a proposed market plan and a assumed market environment. Today imdustry sales, total company sales, industry product categories, company product lines and individual products are the major elements that must be taken into account when estimating future demand for company’s products. Sales manager forecast customer, sales territory, regional , divisional, national & sometimes world sales. They forecast short-range and long range demands. A key factor to a company’s success-sometimes to its survival-is how well the sales manager forecasts the company’s future product sales. Forecasting the future is always a matter of probabilities rather than certainties. A sales forecast is important for at least five reasons. Each reason has an impact on other business function. 1) A sales forecast becomes a basis for setting and maintaining a production schedule.-manufacturing 2) It determines the quantity and timing of needs of labour, equipments, tools, parts & raw-materials-purchasing, personnel. 3) It influences the amount of borrowed capital needed to finance the production and the necessary cash flow to operate the business-controller. 4) It provides a basis for sales quota assignments to various segments of the sales force-sales manager. 5) It is the overall base that determines the company’s business & marketing plans which are further broken down into specific goals-marketing officer. The Forecasting Process. The forecasting procedures refers to a series of procedures used to forecast. It begins when an objective is determined. Next in the process forecast procedures and methods for analyzing data are determined. If the procedures have not been used before, the firm may want to test them. Data are then gathered and analyzed. Often assumptions must be made about the forecast. Following are the steps in the forecasting process: 1) Forecast objective 2) Determine dependent & independent variables. 3) Develop forecast procedure. 4) Select forecast analysis method 5) Total forecast procedure. 6) Gather and analyze data 7) Present assumptions about data. 8) Make & finalize forecast. 9) Evaluate results vs forecast. Sales Forecasting Methods. Two categories of sales forecasting methods exist. “Survey Methods” are qualitative & include executive opinion, sales force composite & customer’s intention surveys. Example of “Mathematical Methods” are test market, market factors, naïve models, trend analysis and correlation analysis.
Survey Methods : Executive opinion User’s Expectation Sales force Composite Build-to-order Executive Opinion: This is the original sales forecasting method and is still the most widely used, regardless of the company size. It’s done in 2 ways 1)by one seasoned individual (usually in a small company) or 2) by a group of individuals sometimes called a jury of executive opinion. The group approach in turn uses 2 methods 1) key executives submit the independent estimates without discussion and these are averaged into the forecast by the chief executive or 2) the group meets, each person presents separate estimates, differences are resolved and a consensus is reached. User’s Expectation: Consumer & industrial companies often poll their actual & potential customers, ranging from individual households to intermediaries. Some companies employ consumer panels that are given products and asked to supply information on the product’s quality, features, price, and whether would buy it. Forecast based solely on this method tend to be overly optimistic. Sales force Composite: This method is often used to generate forecast in the industrial equipment industry and is the common practice in the oil-field supply industry. Take for example, a company selling drilling trucks that when fully equipped sell for $500,000. The firm cannot afford to carry a large inventory and requires that its sales people contact all the potential customers. So each sales person gives an estimate of future sales and his/her immediate manager reviews the estimates with each sales person. The district manager then formulates a forecast that is passed up to the regional manager. Corporate management thus uses the sales force composite forecast to determine how many drilling trucks to be produced for the coming year. Build-to-order: Driven by recurring demand forecasting nightmares and faced with a rapidly changing marketplace, major desktop computer vendors such as Dell have decided to build final products only after firm orders are placed, a practice called build-to-order. Mathematical Forecasting Methods. Test markets: Test markets are a popular method of measuring consumer acceptance of new products. The results from a test market are used to make predictions about future sales. Companies select a limited number of medium sized cities with populations that they feel are representative of their customers in terms of such factors as age, income or shopping behaviour. A product is promoted just as if it were sold nationally, and product features are then evaluated. Instead of producing hundreds of thousands of dollars on marketing
the product nationally, the company spends a lesser amount simulating future sales. Companies may develop several different marketing strategies for different test markets to see which is more effective. Proper experimental design and mathematical analyses are important to correctly evaluate test market data. Naïve Method The assumption underlying the Naïve method, often referred to as the ratio method of forecasting is that what happened in the immediate past will continue to occur in the immediate future the formula is stated this way: Next year’s sales = This year’s sales * This year’s sales/Last year’s sales. Moving Average Method. Moving averages are used to allow for marketplace factors changing at different rates and at different times. With this method both the distant past and the distant future have little value in forecasting. The moving average is the technique that attempts to “smooth out” the different rates of change for the immediate past, usually the past 3-5 years. The forecast is the mean of these past periods and is valid for only one period in the future. The forecast is updated by eliminating the data for the earliest data and adding the most recent data Exponential Smoothing It is similar to the moving average forecasting method. It allows consideration of all past data but less weight is placed on data as it ages. For example last year’s data has greater weight than data from 5 years ago. in other words exponential smoothing is basically a weighted moving average of all past data. The method is used to forecast only one period in future. When using this method a probability weighting factor or smoothing constant is selected arbitrarily. This factor is usually between 0.1 and 0.5 but can range from something greater than zero to something less than 1.this value determines how sensitive the forecast will be for the data. For example larger the value, the more sensitive the forecasting values would be to recent changes in sales. The forecasting equation is : Next year’s sales= a ( This year’s sales) + (1-a) This year’s forecast. Regression Analysis: It’s a statistical method used to incorporate independent factors that are thought to influence sales ( for example population, advertising) into the forecasting procedure. Two or more variables are used to estimate the tendency of sales to vary. One variable required is the dependent variable, which in this case is past sales. Simple Regression variables use only one independent variable such as population. Multiple regression uses 2 or more independent variables such as population and sales force size or population, income & sales force size. SALES BUDGET A sales budget is the amount of money available or assigned for a definite period. It’s based on estimates of expenditure during that period and on proposals for financing the budget. Thus the budget depends on the sales forecast and the amount of revenue
expected to be generated for the organization during that period. The budget for the sales force is a valuable resource that the sales manager re-distributes among lower level managers. Budget funds must be appropriated wisely in order to properly support selling activities that allow sales personnel and total marketing group to reach their performance goals. Budget Purposes The budget is an important factor in the successful operation of the sales force. Top sales managers spend a great deal of time attempting to convince corporate management to increase the size of their budget. Budgets are formulated for many reasons, including the major ones of planning, co-ordination & control. Planning: Corporations and their functional units develop objectives for future periods and budgets determine how these objectives will be met. For example alternative marketing plans, the probable profit from each plan and individual budget for each will be considered before management is able to decide on future management programes. Co-ordination: The budget is the major management tool for co-ordinating the activities of all functional areas and sub-groups within the entire organization. For example sales must be co-ordinated with production to ensure that enough products are available to meet demand. The production manager can use sales forecast and the sales department’s marketing plans to determine the necessary production level. Budgeting allows the financial executive to determine the firm’s revenues & expenses and have enough capital to finance all business operations. However some flexibility must be built into the budget so that plans may be changed in response to market conditions. Many companies allocate a dollar lump sum to their managers, allowing their managers to invest in selling activities dictated by the sales and marketing plans. Thus each sales group has a budget. Control Allocation of budgeted funds gives management control over their use. Sales managers estimate their budget needs, are given funds to operate their units and then are held responsible for reaching their stated goals by using their budgets effectively. As the sales program is implemented and income and expenses are actually generated, managers assess results against the amount budgeted and determine whether they are meeting objectives. Sales Budgeting Methods: How much money does the sales manager receive to operate the sales force ? although no fixed financial formulas exist to appropriate funds, firms use one of the three general methods to determine how money should be allocated. First, some firms use an arbitrary percentage of sales. Second, other firms may use executive judgement. Third , a few companies estimate the cost of operating each sales force unit along with the cost of each sales program over a specific period to arrive at a total budget. Whichever method is chosen the actual amount budgeted will be based on the
organization’s sales forecast, marketing plans, projected profits, top management’s perception of the sales force’s importance in reaching corporate objectives, and the sales manager’s skill in negotiating with superiors. Budgets are often modified several times before the final dollar figures are estimated.
To get started, answer the following questions:
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How much can you realistically sell next year? How much will you charge for your goods or services? How much will it cost to produce your product? How much are your operating expenses?
Do you need to hire employees? If so, how many, and how much will you pay them?
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How much will you pay yourself? How much payroll tax and unemployment tax will you pay?
How much money do you need to borrow, and how much will your monthly loan payments be? The answers to these questions will form the basis of your budget and forecast. If you've already written a business plan, you should know the answers to many of these questions. If not, then this is a lot of information to try to forecast. In either case, answering these questions will help you determine two essential things — your projected income and your expenses. In the income category, conservatively estimate how much sales revenue you'll have next year. Look at what you made last year, and extrapolate and forecast from that. New business owners without this kind of history should try to determine how much their competitors gross, and use that as a guide. Remember to be realistic. If you paint too rosy a picture, you can easily get in over your head and spend money that never materializes. If you make more than your projected income, great. But if you make less, watch out!
As far as expenses go, consider advertising, auto, insurance, rent, taxes, phone, utilities, equipment, payroll — in other words, any and all business expenses, whether you pay them now or incur them in the future. Once you see your projected income and expenses on paper, you'll know exactly how much you need to make every month to keep things afloat, and how much you'll have left over for extra expenses. It will be far less tempting to spend money on business expenses that aren't part of your plan. And that's really what a budget is for — to ensure that your expenses aren't more than your income, so you can keep your company afloat. It's as simple as that.
The sales budget is the starting point in preparing the master budget, since estimated sales volume influences nearly all other items appearing throughout the master budget. The sales budget should show total sales in quantity and value. The expected total sales can be break-even or target income sales or projected sales. It may be analyzed further by product, by territory, by customer, and, of course, by seasonal pattern of expected sales.
A “Sales Budget” usually comes along with “Schedule of Expected Cash Collection” from credit sales, which will be used fpr cash budgeting (later on), and here is the cash collection schedule:
Monthly Cash Collections from Customers Frequently there are time lags between monthly sales made on account and their related monthly cash collections. For example, in any month, credit sales are collected in this manner: 15 percent in month of sale, 60 percent in the following month, 24 percent in the month after, and the remaining 1 percent are uncollectible. The budgeted cash receipts for June and July are computed then (see below):