Mrs.

Nisha Pandey (Assistant Professor) Production Management

Unit-2

Concept of Forecasting
Forecasting is a process of making predictions about the future course of a business or a company
based on trend analysis and past and present data. So essentially data is collected and studied about
the business, and analysis is done to forecast future scenarios that are likely to occur. Hence
forecasting is an important tool in the process of business planning.

Forecasting is the process of projecting past sales demand into the future. Implementing a
forecasting system enables you to assess current market trends and sales quickly so that you can
make informed decisions about the operations. You can use forecasts to make planning decisions
about Customer orders.

Sales forecasting
Sales forecasting is the process of estimating a company’s sales revenue for a specific time period
– commonly a month, quarter, or year. A sales forecast is prediction of how much a company will
sell in the future.
sales forecasting is the process of estimating future sales. Accurate sales forecasts enable
companies to make informed business decisions and predict short-term and long-term
performance. Companies can base their forecasts on past sales data, industry-wide comparisons,
and economic trends.

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. Some firms manufacture on the order basis, but in general, firm produces
the material in advance to meet the future demand.

It is easier for established companies to predict future sales based on years of past business data.
Newly founded companies have to base their forecasts on less-verified information, such as market
research and competitive intelligence to forecast their future business.
Sales forecasting gives insight into how a company should manage its workforce, cash flow, and
resources. In addition to helping a company allocate its internal resources effectively, predictive
sales data is important for businesses when looking to acquire investment capital.

Producing an accurate sales forecast is vital to business success. Hiring, payroll, compensation,
inventory management, and marketing all depend on it. Public companies can quickly lose
credibility if they miss a forecast.

Sales forecasting allows companies to:

• Predict achievable sales revenue;
• Efficiently allocate resources;
• Plan for future growth.
 Mrs. Nisha Pandey (Assistant Professor) Production Management

Types of Sales Forecasting:

There are two types of forecasting:

1. Short-term forecasting and
2. Long-term 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.

2. Long-Term Forecasting:
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.

Features of Forecasting:
Based on the above definitions the following features are explained below:

1-Involvement of Future Events:

Forecasting relates to future events. Forecasting is the essence of planning because planning also
aims at deciding what is to be done in the future.

2-Depends upon Past and Present Event:

Actually, forecasting is made by analysing the past and present relevant data. It takes all the factors
into account, which affect the functioning of the enterprise.

3-Happening of Future Events:

Forecasting defines the probability of happening of future events. Therefore, happening of future
events can be precise only to a certain extent.

4-Makes use of Forecasting Techniques:

As can be gathered from what has gone before that forecasting is a systematic attempt to probe the
future with a view to drawing certain useful infirmness. Such a probing obviously demands a
proper and full analysis of known facts with the help of various qualitative and quantitative
forecasting techniques.

Purpose of sales forecasting

A sales forecast is an important component of any business plan. For the sales rep, as well as the
entire organization, a sales forecast aims to predict future sales and is used as the basis of planning
time and resources. A good forecast should have several objectives, all directed at identifying what
you will sell, when you will sell it and to whom. Sales forecasting allows companies to efficiently
 Mrs. Nisha Pandey (Assistant Professor) Production Management
allocate resources for future growth and manage its cash flow. Sales forecasting also helps
businesses to estimate their costs and revenue accurately based on which they are able to predict
their short-term and long-term performance.

1-Sales forecasting to set sales targets.

A sales forecast is an in-depth report that predicts what a salesperson, team, or company will sell
weekly, monthly, quarterly, or annually.
In order to set good targets, you need to have a reasonably accurate sense of what is possible.
If you’ve never developed a sales forecast to set targets before, you can start by looking at past
performance. What did your top performers sell in their first months and years? What about your
middle performers?

2- Sales forecasting to make strategic decisions.

Forecasting is valuable to businesses because it gives the ability to make informed business
decisions and develop data-driven strategies. Financial and operational decisions are made based
on current market conditions and predictions on how the future looks.

3-Sales forecasting to prepare operations.

Forecasting is the process of projecting past sales demand into the future. Implementing a
forecasting system enables you to assess current market trends and sales quickly so that you can
make informed decisions about the operations. You can use forecasts to make planning decisions
about: Customer orders.

4-Operational Planning and Goal Setting.

Managers often share sales projections with employees to communicate the amount of work
necessary to hit those numbers. Sales forecasts can be used to set goals, both company-wide and
for individuals, and compensation may be tied to meeting these goals. Capital-intensive companies
often adjust the capacity available, both human and machinery, in order to meet sales targets.
Expected sales also impact the amount of inventory needed on hand. Projecting sales is a key step
to managing the budget, as all variable costs will be driven by sales.

5-Financial Planning and Funding.

Both creditors and investors routinely require sales forecasts, the results of which then are
incorporated into their decision-making strategies. Creditors use sales forecasts to estimate the
company's cash flow and debt coverage ability. Investors may use the sales forecast within a wide
number of analyses, depending on the nature of their investment. Business owners typically need
sales projections for financial planning and external funding purposes.

6-Projecting Financial Statements.

Sales forecasts generally are the first step to preparing a full set of projected financial statements.
You can use projected sales as a basis for forecasting the entire income statement by using the
percent of sales method. This method involves calculating income statement line items as a percent
of sales.

7-Benchmarking and Risk Management.

Sales projections often are used for financial benchmarking purposes, comparing the company's
expected performance with those of peer groups or competitors. This allows the business owner
or investors to assess any expected changes in market share. Projected sales also are a key
component of various risk management techniques.
 Mrs. Nisha Pandey (Assistant Professor) Production Management

8-Accuracy
On all levels, the first objective of a sales forecast is accuracy. Sophisticated forecasting software
can help generate forecasts, but software itself is not usually enough. Software programs tend to
rely on past sales to predict future trends. An accurate forecast also takes into account changes in
the overall market, as well as the changing needs and priorities of customers. Talking to clients to
understand their needs for the future and understanding industry trends around you are part of
generating an accurate sales forecast.

9-Adequate Staffing
Many new businesses hire employees after they see problems such as orders not being filled, poor
customer service or overworked staff making mistakes. Projecting your staffing needs in advance
allows you to plan your hiring, ensuring that you get the best people at the right times. Long-term
human resources forecasting requires you to create an organization chart that shows what your
company might look like in a year or two, helping you create job descriptions and determine when
to bring these people on board. Demand forecasting that alerts you to slow and busy production
times helps you better schedule workers to avoid having to hire extra workers because you didn’t
spread your production out or to slow down production because you couldn’t find and train enough
qualified workers in time.
Objective of Forecasting
1-Formulation of Production Policy
Sales forecasts help in formulating suitable production policy so that there may not be any gap
between demand and supply of product this can for the ensure.

2-Regular Supply of Material

By the determination of the desired volume of production on the basis of sales forecasts, One can
evaluate the necessary raw material requirements in the future so as to ensure the regular and
continuous supply of the material as well as controlling the size of inventory as an economic level.

3-Maximum Utilization of Machines

The operations can be so planned that the machines are utilized to their maximum capacity

4- Regular Availability of Labour

Skilled and unskilled workers can be properly arranged to meet the production schedule
requirement.

5-Price Policy Formulation

Sales forecast enables the management to formulate some appropriate pricing mechanisms so that
the level of price does not fluctuate too much in periods of depression of inflation.
6. Proper Control of Sales
Forecasts are calculated region wise and then the sales targets for various territories are fixed
accordingly.

7-Arrangement of Finance
On the basis of the sales forecasts, one can determine the financial requirements of the enterprise
for the production of the desired output.
 Mrs. Nisha Pandey (Assistant Professor) Production Management
8. To Decide about Production Capacity
The size of the plant should be such that the output confirms with requirements. The too small or
too large the size of the plant may not be in the economic interest of the enterprise. By studying
the demand pattern for the product and the forecasts for the future enterprise can plan for a
plant/output of desired capacity.

9. Labour Requirement
Expenditure on labour is one of the most important components is the cost of production. Reliable
and accurate sales forecasts can help the management to access the appropriate labor requirements .

10. Long-Term Finances on Reasonable

Long-term Production Planning can help the management to arrange for long-term finances on
reasonable terms and conditions.

Importance of Sales Forecasting

1. It helps businesses in planning, budgeting, managing risks and making better decisions.
2. Good inventory control is effectively benefited by fending off the deficiency of overstocking
and understocking.
3. Sales forecasting facilitates the allocation and reallocation of sales territories.
4. It allows companies to allocate resources effectively for future growth and manage their
cash flow.
5. It helps sales teams achieve their goals by identifying early warnings in their sales pipeline.
6. Sales forecasting also encourages businesses to estimate their costs and revenue precisely
based on the prediction of their short-term and long-term performance.
7. Sales opportunities are searched out based on the forecast, and therefore the discovery of
selling success is made.
8. It is a measuring factor by which the efficiency of the sales personnel or the sales department
can be measured.
9. It helps in preparing production and purchasing schedules.
10.It helps to decide policies.
11.It helps to determine production volumes considering availability of facilities, like
equipment, capital, manpower, space etc.
12.It forms a basis of sales budget, production budget natural budget etc.
13.It helps in taking decision about the plant expansion and changes in production mix or
should it divert its resource for manufacturing other products.
14.It helps in deciding policies.
15.It facilitates in deciding the extent of advertising etc.
16.The sales forecast is a commitment on the part of the sales department and it must be
achieved during the given period.
17.Sales forecast helps in preparing production and purchasing schedules.
18. Accurate sales forecasting is a very good aid for the purpose of decision making.
19. It helps in guiding marketing, production and other business activities for achieving these
targets.
 Mrs. Nisha Pandey (Assistant Professor) Production Management
Elements of Sales Forecasting

Here are some elements of a good sales forecasting methods.

Forecasting, therefore, helps to know the expected profits or losses and just by going through
certain reports and records of the company, enables the forecaster to take necessary decisions.
Decision-making becomes better and easier when forecasting is undertaken on scientific basis.
James W. Redfield has summarized the essential elements as follows:

1-Developing the ground work:

It carries out an orderly investigation of products, company and industry. The group work
preparation requires a thorough study, investigation and analysis of the company, its products, its
market share, its organisational structure and the industry. The investigation will involve the past
performance of all these factors, their growth over a period of time and the extent of their inter-
relationships and inter-dependence. The aim is to build a foundation on which future estimates can
be based.

2-Estimating future business:

This follows a clear-cut plan for working out future expectancies in the form of natural undertaking
with key executives. The future expectancy of the business can be reasonably computed from the
past data as well as the input from the key executives of the organisation, sales personnel and other
specialists.
This forecast is developed with the participation of the key personnel and is officially
communicated to all. Thus, all these people assume responsibility for meeting these forecasts and
accountability for any deviations from this forecast.

3-Comparing actual with estimated results:

Checking the attained with anticipated results of the business periodically and tracking down
reasons for major differences. The forecast estimates over the future years provide benchmarks
against which the actual growth and results can be measured and compared. If there are significant
variations between the two, one way or another, the reasons for such deviations can be investigated
and analysed.

4-Refining the Forecast Process:

Once familiarity with estimating the future of the business is gained through practice, sharpening
the approach and refining the procedure becomes quite easy. Thus, these constant revisions and
refinements and improvements would add to the experience and skill in forecasting, since
proficiency in forecasting can only be gained through practice and experience.
The above elements indicate a systematic approach to the problem of forecasting. As a materiality,
these elements are found in any research procedure.

5-Accuracy: The previous method must be monitored for want of accuracy by observing whether
the forecasts made in past are accurate or not.

6-Simplicity: this method should be easy to understand and simple, which can satisfy the top
management persons.

7-Availability: The forecasting technique must be able to produce meaningful results. It also
should be easy to implement.
 Mrs. Nisha Pandey (Assistant Professor) Production Management
8-Economy: Cost is the most significant factor so, the method adopted should borrow a minimum
cost.
Methods of Demand Forecasting
There is no easy or simple formula to forecast the demand. Proper judgment along with the
scientific formula is needed to correctly predict the future demand for a product or service.
Some methods of demand forecasting are discussed below:

Forecasting Techniques

1. Survey of Buyer’s Choice-

When the demand needs to be forecasted in the short run, say a year, then the most feasible
method is to ask the customers directly that what are they intending to buy in the
forthcoming time period. Thus, under this method, the potential customers are directly
interviewed. This survey can be done in any of the following ways:

i-Complete Enumeration Method: Under this method, nearly all the potential buyers
are asked about their future purchase plans.
ii-Sample Survey Method: Under this method, a sample of potential buyers is chosen
scientifically and only those chosen are interviewed.
iii-End-use Method: It is especially used for forecasting the demand of the inputs. Under
this method, the final users i.e., the consuming industries and other sectors are identified.
The desirable norms of consumption of the product are fixed, the targeted output levels are
estimated and these norms are applied to forecast the future demand of the inputs.
Hence, it can be said that under this method the burden of demand forecasting is on the
buyer. However, the judgments of the buyers are not completely reliable and so the seller
should take decisions in the light of his judgment also. The customer may misjudge their
demands and may also change their decisions in the future which in turn may mislead the
survey. This method is suitable when goods are supplied in bulk to industries but not in the
case of household customers.
 Mrs. Nisha Pandey (Assistant Professor) Production Management
2. Collective Opinion Method
Under this method, the salesperson of a firm predicts the estimated future sales in their
region. The individual estimates are aggregated to calculate the total estimated future sales.
These estimates are reviewed in the light of factors like future changes in the selling price,
product designs, changes in competition, advertisement campaigns, the purchasing power
of the consumers, employment opportunities, population, etc. The principle underlying this
method is that as the salesmen are closest to the consumers, they are more likely to
understand the changes in their needs and demands. They can also easily find out the reasons
behind the change in their tastes.
Therefore, a firm having good sales personnel can utilize their experience to predict the
demands. Hence, this method is also known as Salesforce opinion or Grassroots approach
method. However, this method depends on the personal opinions of the sales personnel and
is not purely scientific.

3. Barometric Method
This method is based on the past demands of the product and tries to project the past into
the future. The economic indicators are used to predict the future trends of the business.
Based on the future trends, the demand for the product is forecasted. An index of economic
indicators is formed. There are three types of economic indicators, viz. leading indicators,
lagging indicators, and coincidental indicators.
The leading indicators are those that move up or down ahead of some other series. The
lagging indicators are those that follow a change after some time lag. The coincidental
indicators are those that move up and down simultaneously with the level of economic
activities.

4. Market Experiment Method

Another one of the methods of demand forecasting is the market experiment method. Under
this method, the demand is forecasted by conducting market studies and experiments on
consumer behaviour under actual but controlled, market conditions. Certain determinants of
demand that can be varied are changed and the experiments are done keeping other factors
constant. However, this method is very expensive and time-consuming.

5. Expert Opinion Method

Usually, the market experts have explicit knowledge about the factors affecting the demand.
Their opinion can help in demand forecasting. The Delphi technique, developed by Olaf
Helmer is one such method.
Under this method, experts are given a series of carefully designed questionnaires and are
asked to forecast the demand. They are also required to give the suitable reasons. The
opinions are shared with the experts to arrive at a conclusion. This is a fast and cheap
technique.

6. Statistical Methods
The statistical method is one of the important methods of demand forecasting. Statistical
methods are scientific, reliable and free from biases. The major statistical methods used for
demand forecasting are:
 Mrs. Nisha Pandey (Assistant Professor) Production Management
i-Trend Projection Method: This method is useful where the organization has sufficient
amount of accumulated past data of the sales. This date is arranged chronologically to obtain
a time series. Thus, the time series depicts the past trend and on the basis of it, the future
market trend can be predicted. It is assumed that the past trend will continue in future. Thus,
on the basis of the predicted future trend, the demand for a product or service is forecasted.

ii-Regression Analysis: This method establishes a relationship between the dependent

variable and the independent variables. In our case, the quantity demanded is the dependent
variable and income, the price of goods, price of related goods, the price of substitute goods,
etc. are independent variables. The regression equation is derived assuming the relationship
to be linear. Regression Equation: Y = a + bX. Where Y is the forecasted demand for a
product or service.