Sales Forecasting: Meaning, Importance and Methods

Meaning of Sales Forecasting:

Definition: 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.

Any forecast can be termed as an indicator of what is likely to happen in a specified future time
frame in a particular field. Therefore, the sales forecast indicates as to how much of a particular
product is likely to be sold in a specified future period in a specified market at speci-fied price.

Accurate sales forecasting is essential for a business house to enable it to produce the re-quired
quantity at the right time. Further, it makes the arrangement in advance for raw mate-rials,
equipment’s, labour etc. Some firms manufacture on the order basis, but in general, firm
produces the material in advance to meet the future demand.

Forecasting means estimation of quantity, type and quality of future work e.g. sales. For any
manufacturing concern it is very necessary to assess the market trends sufficiently in ad-vance.
This is a commitment on the part of sales department and future planning of the entire concern
depends on this forecast.

The management of a firm is required to prepare its forecast of share of the market that it can
hope to capture over the period of forecasting. In other words, sales forecast is an estimate of the
sales potential of the firm in future. All plans are based on the sales forecasts.

This forecast helps the management in determining as to how much revenue can be expected to
be realised, how much to manufacture, and what shall be the requirement of men, machine and
money.

Thus we can define sales forecasting as, estimation of type, quantity and quality of future sales.
Goal for the sales department is decided on the basis of this forecast and these forecasts also help
in planning future development of the concern. The sales forecast forms a basis for production
targets.

From above, looking to its importance, it is essential that sales forecast must be accurate, simple,
easy to understand and economical.

Thus we can say that a sales forecast is an estimate of the amount of sales for a specified future
period under a proposed marketing plan or programme. Sales forecast can also been defined as,
an estimate of sales in terms of money or physical units for a specified future period under a
proposed marketing plan or programme and under an assumed set of economic and other forces
outside the unit for which the forecast is made.
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:

1. Competition:

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.

2. Changes in Technology:
With the advancement of technology, new products are com-ing in the market and the taste and
the likings of the consumer’s changes with the advancement and change of technology.

3. Government Action:

When the government produces or purchases then depending upon the government policy and
rules, the sales of the products are also affected.

4. 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 re-quired
quantity at the right time. Further, it makes the arrangement in advance for raw mate-rials,
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:

1. Short-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:

1. To adopt suitable production policy so that the problem of overproduction and short supply of
raw material, machines etc. can be avoided.

2. To reduce the cost of raw materials, machinery etc.

3. To have proper control of inventory.

4. To set the sales targets.

5. To have proper controls.

6. To arrange the financial requirements in advance to meet the demand.

2. Long-Term Forecasting:
The forecasting that covers a period of 5, 10 and even 20 years. The period here also de-pends
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:

1. To plan for the new unit of production or expansion of existing unit to meet the demand.

2. To plan the long-term financial requirements.

3. To train the personnel so that man-power requirement can be met in future.

Methods Used for Sales Forecasting:

 Jury Method
 Survey of Expert’s Opinions
 Delphi Method
 Sales Force Composite Method
 End-use Method
 Market Share Method
 Substitution Method
 Market Test
 Analytical and Statistical Methods

1. Jury Method:

Definition: The Jury Method also called as an Executive Opinion Method is a sales forecasting
method, wherein the executives from different departments come together and forecast sales for
the given period, on the basis of their experience and specialization. The jury method is based on
the judgments, the top executives of Marketing, HR, Finance, Production department come
together and give their opinions on sales trend. The final forecast is arrived by averaging the
opinions given by all at the meeting.

This method of sales forecasting can be performed in two ways:

Top Jury Method: In this, the participants in the discussions are limited to the top executives
only. This type of method is adopted, when the problem of discussion is complex, and only the
top level expertise is required to arrive at the final decision.

Percolated Jury Method: Here, along with the top executives, several marketing, finance,
production and other departments executives are included in the discussions. This method is
adopted when the opinions of different people at different levels in the organization, who are
experts in their respective fields, are required to arrive at the final forecast. The sales forecast
through the jury method could be reliable, only when the executives involved in the discussions
are well informed about the overall economic environment and the conditions existing within the
industry. They must also be well versed with all the strengths and weaknesses of their firm.

The jury method suffers from serious limitations, firstly, it is based on the opinions and not
on the facts. Thus, the opinions could be biased. Secondly, the responsibility to forecast gets
distributed to all. Therefore, no single person could be held accountable in case the forecast turns
out to be false. Thirdly, a general forecast can be made through this method, which could not be
readily broken down into month-wise, product-wise, department-wise data. Hence, a separate
team is required to prepare such forecasts.

2. Survey of Expert’s Opinions

Definition: In Survey of Expert’s Opinions, the specialized group of people in the concerned
fields, from both inside and outside the organization, are approached and asked to give their
opinions on sales trend. The Survey of Expert’s Opinions is the most common method of sales
forecasting, employed by the organizations. This method is also based on the judgment of
experienced people but is different from the jury method.

In the case of a jury method, the group of executives within the organization is gathered to
forecast the sales, whereas, in the case of the Survey of Expert’s Opinions, the experts from both
inside and outside the organization are approached to give their estimates on sales. This is a
comprehensive sale forecasting method that helps in developing the overall industry sales
forecast, while the jury method is restricted to the company sales forecast.

The expert’s opinions method is used when the organization wants the forecast to be more
accurate and which holds true for the entire industry. This is only possible through the group of
experts who have the complete information on the overall economic environment and the
conditions prevailing in the industry. Hence, people from outside the organization, who are very
close to the market are approached and are required to sit with the company’s executives and
reach to the final forecast. The Survey of Expert’s Opinions gives due weights to the experience
and expertise of people who know the market and the firm. This method, when employed
successfully can give accurate forecasts.

But however, this also suffers from the demerits. Firstly, the experts from outside may be
reluctant to give the complete information about the conditions prevailing in the industry.
Secondly, the discussions could be biased that may result in false predictions. Thirdly, the
responsibility to take decisions is distributed on all and hence no single person could be held
responsible in case the forecast proves to be wrong. Finally, a general forecast is made and could
not be readily broken down into the product-wise, month-wise and department-wise forecasts.

3. Delphi Technique

Definition: The Delphi Technique refers to the systematic forecasting method used to gather
opinions of the panel of experts on the problem being encountered, through the questionnaires,
often sent through mail. In other words, a set of opinions pertaining to a specific problem,
obtained in writing usually through questionnaires from several experts in the specific field is
called as a Delphi technique. In a Delphi technique, the group facilitator or the change agent
aggregates all the anonymous opinions received through the questionnaires, sent two or three
times to the same set of experts. The experts are required to give justification for the answers
given in the first questionnaire and on the basis of it, the revised questionnaire is prepared and is
again sent to the same group of experts. The experts can modify their answers in accordance with
the replies given by other panel members. The objective of a Delphi technique is to reach to the
most accurate answer by decreasing the number of solutions each time the questionnaire is sent
to the group of experts. The experts are required to give their opinion every time the
questionnaire is received, and this process continues until the issues are narrowed, responses are
focused, and the consensus is reached. In a Delphi technique, the identity of the group members
is not revealed, and they are not even required to gather for a physical meeting. Each member is
free to give his opinion with respect to the problem, thereby avoiding the influential effect that a
powerful or authoritative member can have on the other group members.

This technique is quite advantageous as diverse opinions can be gathered from the large pool
of experts who might be geographically separated. Also, the quality of decision gets improved as
the expertise of each group member is capitalized to reach to a final solution.

4. Sales Force Composite Method

Definition: The Sale Force Composite Method is a sale forecasting method wherein the sales
agents forecast the sales in their respective territories, which is then consolidated at
branch/region/area level, after which the aggregate of all these factors is consolidated to develop
an overall company sales forecast. The sales force composite method is the bottom-up approach
where the sales force gives their opinion on sales trend to the top management. Since, the
salesmen are the people, who are very close to the market, can give a more accurate sales
prediction on the basis of their experience with the direct customers.

There are several advantages of sales force composite forecast method.

 The intimate knowledge and experience of the sales force in their respective territories
can be used efficiently.
 The responsibility to forecast sales rests on the shoulders of the sales agent and thus
could be held accountable if anything goes wrong.
 Since the sales agents forecast the sales by themselves, put more efforts to achieve them.
 This method is more reliable because of a large population sample and moreover, it can
be readily broken down into product-wise, month-wise, area-wise forecast.

The sales force composite method is not free from the limitations too.

 Since the sales agents are not the experts in forecasting, they cannot employ the
sophisticated forecasting techniques properly and neither they have complete data to have
a fact-based forecasting.
 Also, the salesman often gets heavily influenced by the conditions existing in his
territory, due to which he either becomes more optimistic or more pessimistic about the
future sales.
 The sales agent might be well informed about all the conditions prevailing in his territory,
but may not be well equipped with the complete information about the economic
environment and the industry as a whole.
 Sometimes, the sales agent intentionally gives fewer sales forecast, so that they can fetch
more incentives or bonus from the management on exceeding the sales targets.

This method is again based on the judgments but is different from the jury and survey of expert’s
opinions method. The difference is while both the methods depend on the judgments made by a
few top executives, the sales force composite methods encompasses the aggregate judgments of
the entire sales force. This method is considered to be the grass-root level method, where the
forecast for the territorial sales is made first, and then the overall company’s sales forecast is
made on this basis.

5. End Use Method

Definition: Under the End Use Method, also called as the User Expectation Method, the list of
several users of the product under forecasting is prepared first, who are then asked about their
individual purchasing patterns and then from such information the complete product demand
forecast is ascertained. Simply, the method used to know the buyer’s likely consumption of the
product, his future buying plans and likely the market share of the company is called as end use
method. Since the intentions of the buyers are taken into the consideration, this method is also
called as the “Survey of Buyer’s Intentions”. The End Use Method is particularly suitable for
Industrial Products such as raw materials or intermediary products because unlike consumer
goods these are limited in number and can be surveyed exhaustively. Also, the buyers are
substantial in the case of the industrial goods, whereas in the case of the consumer goods, several
thousands of buyers contribute towards the total sales, where each accounts for a very small
quantity. The other reason that supports this discussion is that the industrial buyers are often
clustered in the industrial belts and are accessed directly by the manufacturers, whereas in the
case of the consumer goods, the buyers are scattered and are reached via several distribution
channels or intermediaries. Finally, the user survey can be well applied to the industry buyers as
it involves the production people, material, and corporate planning executives in purchase team,
who have a complete knowledge about the product whereabouts and can very well relate their
needs to a product.

One of the major advantages of the end use method is that the forecast comes directly from
the end user i.e. customer himself. Also, such forecast is already broken into user-wise and
industry-wide data and thus requires no extra efforts to sort these.

The end use method is not free from the demerits. The major limitation of this method is that
sometimes the respondents themselves does not know about their consumption patterns and
might be reluctant in disclosing their buying plans.

6. Market Share Method

Definition: The Market Share Method is yet another sales forecasting method, wherein the
company first works on the industry forecast, then applies the market share factor and then
finally arrive at the company’s forecast. Simply, the company’s sales forecast is deduced from
the data gathered on the industry sales and from the market share of the company. The market
share of the firm is the key factor in this method, and it can be determined through the past sales
records, company’s present position – its plans for future, competitor’s sales records – its plans
and marketing strategies, customer’s brand preferences, etc. All this information can be collected
through a detailed marketing audit. What is Marketing Audit? A marketing audit is the
systematic and comprehensive analysis and interpretation of the business marketing environment
(both internal and external), firm’s goals, objectives, strategies and principles that help in
identifying the area of problem and recommending the solutions thereto. Through a marketing
audit, the firm can realize its relative brand image, market share and strengths and weaknesses
with respect to its competitors in the industry. Not only through the marketing audit the firm can
access to the competitor’s plans, policies and activities through a market intelligence system.
What is Market intelligence system? It refers to the systematic collection of the relevant
marketing data from all the possible sources and then converting it into the meaningful
information. Through this, the complete information about the competitors could be gained from
the channel partners, who are closely associated with the market and have all the details about all
the industry players. Thus, the market share method includes the complete study of the industry
forecast and the market share of the company, that helps in deducing the final company’s sales
forecast. This conversion from industry forecast to the company specific sales forecast is quite
difficult and hence requires the expertise. Once the market share is determined, the data is
consolidated to reach to the company’s forecast.

The limitations of the market share method are:

 The conversion of industry forecast to the company specific sales forecast is quite tedious
and hence requires the expertise.
 It is a complex process as the entire business environment is scrutinized before reaching
to the final forecast.
 The wrong information about the marketing environment may result into a wrong sales
forecast.

One of the advantages of this method is that it uses the market share to reach to the company’s
sales forecast, and this market share is deduced from a detailed study of the business marketing
environment and hence, is considered to be the most reliable forecast.

7. Substitution Method

Definition: In Substitution Method or a Replacement Method, the management first works on

the sales forecast of the existing product, using any methods of forecasting and then uses this
data to forecast the sales of a new product that will be launched as a substitute for the old
product. Simply, the method used to forecast the sales of a new product on the basis of the sales
forecast of the old existing product in the market is called as the substitution method. This
method is based on the premise that the new product often displaces the old product, or old use
patterns and hence the buying patterns of the old product can be studied thoroughly to estimate
the demand for its substitute product.

8. The Test Marketing is one of the methods used under the Market Test. What is Test
Marketing? The Test Marketing is yet another method of sales forecasting, wherein the new
product is launched in the selected geographical areas, the representative of the final market, to
check the viability of the product and its demand among the selected group of people. The test
marketing is the most reliable method of sales forecasting wherein the product is launched in a
few selected cities/town to check the response of customers towards the product. On the basis of
such response, the firm decides whether to commercialize the product on a large scale or not.
The test marketing must be performed with utmost care; the marketers must select those areas for
testing that depicts the true image of the overall market. benefits. Firstly, it helps the firms to test
and try the product beforehand. Secondly, test marketing enables the firms to look at the pros and
cons of the product at the early stage and make decisions on whether to continue with the
product or drop the product idea very much before the commercialization.

9. Analytical and Statistical Methods

Definition: There are several Analytical and Statistical methods of sales forecasting, that a firm
can employ on the basis of its forecasting needs. These methods are listed below:

Simple Projection Method: Under this method, the firm forecast the current year’s sales by
simply adding up the expected growth rate to the last year’s sales. This growth rate can be
determined by either considering the industry’s growth rate or by taking the growth rate achieved
by the top company (leader) in the industry. Often the companies use the following formula to
arrive at the sales projection:

Next year’s sales = (Current Year’s Sales)2 / Last Year’s Sales

This method proves to be fruitful for only those firms whose sales are relatively stable or show
an increasing trend.

Extrapolation Method: The extrapolation method is again a project/trend method, but is quite
complex than the simple projection method. Here, the sales figures of past several years are
plotted on graph paper and the points are connected via a line which is further stretched to obtain
the future sales figures. It is assumed that the future sales will follow the same pattern as
followed by the past sales trend and observes the same curve on a graph. This method can be
applied effectively where the firms have the steady past sales and expect no abrupt disruptions in
the future.

Moving Averages Method: The moving averages method is used to predict future sales more
accurately by eliminating the effects of seasonality and other irregular trends in sales. This
method provides the time series of moving averages. Here, each time series point is the
arithmetical or the weighted average of a number of preceding consecutive points. Minimum two
years past sales data are required in case the seasonal effects on the sales persists.

Exponential Smoothing: The exponential smoothing is yet another projection method and
works on the similar guidelines of the moving averages methods. Here also, each point of time
series is the arithmetical average of preceding consecutive points and where the heaviest weight
is assigned to the most recent data. This method is often used in the situation where the data
under forecast is large. The exponential smoothing has the stable response to change, and the
response can be changed accordingly.

Time Series Analysis: The time series analysis is yet another most extensively used sales
forecasting method wherein the sales of several continuous years are chronologically ordered,
and the pattern is studied thereafter. The time series method helps in analyzing the following:

The Seasonal Variation, i.e. the change in the sales due to the seasonal variations.

The Cyclical Patterns, i.e. the sales pattern that repeat itself after every year.
 Trends in Data

The Growth Rate, i.e. the rate at which the sales grow with each year.

This method is based on the assumption that the factors affecting the sales do not change
much over a period of time and hence the future is derived from the past.

The demands have following patterns:

(i) Constant Pattern:

Refer Fig. 42.4. In this pattern demand remains constant throughout the period.

(ii) Trend Pattern:

It refers to the long-term growth or decline in the average level of demand, as shown in Fig. 42.5.

(iii) Seasonal Pattern:

It refers to the annually repetitive demand fluctuation that may be caused by weather, tradition or
other factors. (Refer Fig. 42.6).

(iv) Cycle Pattern:

Business cycle refers to the large deviation to actual demand values due to complex
environmental influences. Refer Fig. 42.7. These are similar to the seasonable components
except that seasonality occurs at regular intervals and is of constant durations whereas it varies in
both time and duration of occurrence.

(v) Combination of Different Pattern:

In long term forecast (more than 2 years) seasonal factors are ignored and focus is given on trend
component with a minor emphasis on business cycle. In medium term forecasts (few months to 2
years), the trend factor becomes less important and the seasonal and random factors are given
more impor-tance.

For short duration (one week to 3 months) main concern is random fluctua-tions. Generally when
a business concern is in operation, combination of trend and seasonal variations are given
importance. Such a pattern is shown in Fig. 42.8.
Combination of Different Pattern

Regression Analysis: This method is adopted to study the functional relation of those factors
that influence sales. The sale is the dependent variable while the factors that influences sales are
explanatory or causal variables. Thus, in this method, the relationship between the dependent
variable (sales forecast) and the causal variable is measured. The following regression equation
shows the different relationships between the sales and the factors influencing the sales:

Y = a+b1x1+b2x2+…..+bnxn

Where, Y = sales,

x1,x2 …..xn represents the causal factors

b1,b2….bn are the constants that show the extent to which the causal factors contribute
towards the sales.

Complex Econometric Models: This is an another analytical method of sales forecasting

wherein the economic theories are expressed in the mathematical terms so that these can be
verified by the statistical methods. This method is used to predict the future events by measuring
the impact of one economic variable upon another.

The econometric model depends on the following principles:

Sales of any product depend on several variables.

The sale is the dependent variable while the casual factors are the independent variables.

There is a constant interaction between the sales and the causal factors.

Also, there is a constant interaction among the independent variables themselves.

There are two types of independent variables: exogenous variables (constitutes non-
economic forces, such as nature, or politics) and endogenous variables (economic forces, such as
income, price, employment, etc.)
 The interrelationship between sales and the independent variables can be determined
through the statistical analysis of the past data.

Thus, a company can use either of these methods to forecast the demand for goods and services
and set the sales objectives accordingly.

10. Market Survey

Definition: Market Survey is another most widely used sales forecasting method which is used to
gather information related to the market that cannot be collected from the company’s internal
records or the external published sources of data. The market survey method is typically
employed in the situations where the primary data or first-hand data is required to forecast the
demand. Such situation exists when the company wants to introduce a new product or a new
variant into the market; then it resorts to the primary data. Similarly, the company entering into a
new business relies on the market survey to forecast its demand or sales. Since, there are no past
records available with the firm, so it has to collect information from the market or from the
customers directly to forecast the sales. Usually, the companies conduct the survey among the
sample of consumers to understand their purchasing capacity, attitudes and purchasing habits.

Sometimes, the channel partners are also surveyed to know their attitudes, likely purchases, and
the overall industry trend. Often the market survey is used as a synonym of market research or
market analysis, but this is not correct. In fact, the market survey is one of the techniques being
used in the market research. The main advantage of the market survey method is that it helps in
gathering the original or primary data specific to the problem concerned. But however, a
collection of primary data could be time-consuming as well as expensive.

Uses of Sales Forecast:

The sales forecast are helpful for various divisions of a concern.

Some of such uses are given hereunder:

1. Product Planning:

From forecasts we find out which product is more profitable and which should be manufactured
and which should be dropped.

2. Planning Expansions:

Long range forecasts can predict future demand trends, which will enable the planning for
expansion of the concern.

3. Financial Planning:

Sales forecast permits an evaluation of expenses and income etc.

4. Inventory Control:

It facilitates better planning and control over the inventories.

5. Production Control:

It will help in better production control, i.e. better use of equipment’s, controls over-time of
labour, better deliveries, better control over work-in-progress in-ventories.

6. Sales Planning:

It helps in finding out which territory needs more attention. Various sales programme can be
reassessed looking to their achievements.

Statistical Data Helpful in Sales Forecasting:

(A) For assessing general economic conditions of the country:

1. Industrial Production Index:

This index is based on the physical output of the factories and mines.

2. Bank Debits:

This will give overall financial condition of the business.

3. Employment:

Increased employment anticipates growth in demand, while decline in employment anticipates

decline in production.

(B) For Assessing Future Price Trends:

1. Money in Circulation:

Increase of money in circulation without corresponding in-crease in goods supply indicates

prices will rise.

2. Crop Production:

It indicate the trend of prices for agricultural products.

3. Price Index:

It is a reliable indicators prepared by the government.

(C) For Assessing Purchasing Power of the Consumer:

1. Rate of Wages:
Wage rates, bonus etc., indicates worker’s purchasing power.

2. Disposal Income:

This shows the actual amount of money the consumer is left to spend.

Applications of Sales Forecast:

Sales forecast can be used for following purposes:

1. It helps the management to decide marketing strategies.

2. It helps in preparing the budget and for setting financial policies.

3. With reliable sales forecast it is possible to produce at an average rate so that plant capacity
and man power is fully utilized during the entire period. Thus the forecast-ing enables to
overcome seasonal variations.

4. It helps in material planning and avoids the evils of both the over-stocking and under-
stocking.

5. From forecasts we can find out which product is more profitable and which should be
manufactured and which should be dropped.

6. Long range forecasts can predict future demand trends, which will enable the plan-ning for
expansion of the concern.

7. It helps in finding out which territory needs more attention. Various sales programmes can be
reassessed looking to their achievements.