“ BUDGETTING AND SALES

FORECASTING

LECTURE 7

Fathurrahman Anwar, SE., MBA

”
References:
K. Shim, Jae, Joel G. Siegel. Budgetting Basic and Beyonds. 4th Ed. John Willey & Sons Inc.
Introduction

• Management in both private and public organizations typically operates under

conditions of uncertainty or risk.
• Probably the most important function of business is forecasting, which is a
starting point for planning and budgeting.
• The objective of forecasting is to reduce risk in decision making.
• In business, forecasts form the basis for planning capacity, production and
inventory, manpower, sales and market share, finances and budgeting, research
and development, and top management’s strategy.
The Purpose of Forecast

• Forecasts are needed for marketing, production, purchasing, manpower, and

financial planning.
• Further, top management needs forecasts for planning and implementing long-
term strategic objectives and planning for capital expenditures.
• More specifically, marketing managers use sales forecasts to determine optimal
sales force allocations, set sales goals, and plan promotions and advertising.
• Market share, prices, and trends in new product development are also required.
Sales Forecast and Managerial Functions
Forecasting Methods

Qualitative Approach Quantitative Approach

Qualitative approach—forecasts based on
judgment and opinion:
 Executive opinions
 Delphi technique
 Sales force polling
 Consumer surveys
Forecasts based on historical data
a. Naive methods
 Moving average
 Exponential smoothing
 Trend analysis
 Decomposition of time series

b. Associative (causal) forecasts

 Simple regression
 Multiple regression
 Econometric modeling
Criteria For Selecting Forcasting
Method
1. What is the cost associated with developing the forecasting model, compared
with potential gains resulting from its use? The choice is one of benefit-cost
trade-off.
2. How complicated are the relationships that are being forecasted?
3. Is it for short-run or long-run purposes?
4. How much accuracy is desired?
5. Is there a minimum tolerance level of errors?
6. How much data are available? Techniques vary in the amount of data they
require.
Common Features and Assumptions
Inherent in Forecasting
1. Forecasting techniques generally assume that the same underlying causal relationship
that existed in the past will continue to prevail in the future. In other
words, most of our techniques are based on historical data.
2. Forecasts are rarely perfect. Therefore, for planning purposes, allowances
should be made for inaccuracies. For example, the company should always
maintain a safety stock in anticipation of a sudden depletion of inventory.
3. Forecast accuracy decreases as the time period covered by the forecast (i.e., the
time horizon) increases. Generally speaking, a long-term forecast tends to be
more inaccurate than a short-term forecast because of the greater uncertainty.
4. Forecasts for groups of items tend to be more accurate than forecasts for individual
items, because forecasting errors among items in a group tend to cancel each other out.
For example, industry forecasting is more accurate than individual firm forecasting.
Steps in the Forecasting Process

1. Determine the what and why of the forecast and what will be needed. This will
indicate the level of detail required in the forecast (e.g., forecast by region, by
product), the amount of resources (e.g., computer hardware and software, manpower) that can be
justified, and the level of accuracy desired.
2. Establish a time horizon, short term or long term. More specifically, project for
the next year or next five years.
3. Select a forecasting technique. Refer to the criteria discussed before.
4. Gather the data and develop a forecast.

Identify any assumptions that had to be made in preparing the forecast and
using it.
5. Monitor the forecast to see if it is performing in a manner desired. Develop an
evaluation system for this purpose. If not, go back to Step 1
Factors affecting sales forecasting
Internal Factors
External Factors

 Labour problems
 Relative state of the economy
 Inventory shortages
 Direct and indirect competition
 Working capital shortage Price changes
 Styles or fashions
 Change in distribution method
 Consumer earnings
 Production capability shortage
 Population changes
 New product lines 4
 Weather 3
Benefit of Sales Forecast

 Better control of Inventory

 Staffing
 Customer Information
 Use for Sales People
 Obtaining Financing
Limitation of Sales Forecast

 Part hard fact, part guesswork

 Forecast may be wrong
 Times may change
 Causal Methods
Linear Regression
Deviation, a = Y/N
Y Regression
Estimate of or error
Y from equation: b = YX/X2
Dependent variable Y = a + bX
regression
equation

{ Actual
Y = dependent variable
X = independent variable
a = Y-intercept of the line
value b = slope of the line
of Y

Value of X used
to estimate Y

X
Independent variable
Sales Forecasting Example Using Least
Square Method
Year = X Sales =Y X Y.X X2

2015 5,0 -2 -10,0 4

2016 5,6 -1 -5,6 1
2017 6,1 0 0 0
2018 6,7 1 6,7 1
2019 7,2 2 14,4 4
Y=30,6 Y.X=5,5 X2=10

a = Y/n = 30,6/5 = 6,12

b = YX/X2 = 5,5/10 = 0,55

Y’= 6,12 + 0,55 X Y2021 = 6,12 + 0,55 X 4

Y2021 = 8,32