Meaning of Sales Forecasting
Prediction of future sales is what is known as sales forecasting. Every manufacturer makes an estimation of the sales likely to take place in the near future. It gives focus to the activities of a business enterprise. In the absence of sales forecast, a business has to work at random.
A businessman who invests a large amount of capital in his business, cannot afford to work haphazardly. He has to plan his production and sales activities. Forecasting helps the business to work according to a plan, i.e., systematically.
Importance of Sales Forecasting
1. Sales forecasting enables a business organization to work systematically.
2. Forecast enables the production manager to set target for his workers.
3. It enables the sales department to fix responsibilities on every salesman.
4. In the absence of sales forecast, a business enterprise may work without any focus and this may result in wastage of its resources.
5. It helps to cut down wasteful expenditure and as a result the goods can be offered at a fair price.
6. Sales forecast enables all the departments of the business to work together in proper co-ordination and co-operation.
7. As target is set for each individual and department, it is easy to control performance.
8. Sales forecasting is vital for preparing budget.
9. It helps to determine the production capacity that is actually required.
10. Sales forecast helps in product mix decisions as well. It enables the business to decide whether to add a ncw product to its product line or to drop an unsuccessful one.
Methods of Sales Forecasting
There are for important methods of sales forecasting. They are
- Jury of Executive opinion method,
- Sales force opinion method,
- Customers’ expectation method,
- Statistical method.
They are explained as follows.
1. Jury of Executive Opinion Method:
This is a conventional approach to sales forecasting. Under the Jury of Executive opinion method, sales forecasts are made based on the opinions of the top executives of the company.
The executives will take into account the past performance of the business, the present market conditions and the future trend before arriving at a conclusion.
This is a very simple method of sales forecast and the approach is mainly subjective.
Merits of executives opinion method
1. It is a very simple method.
2. Detailed analysis is not required to arrive at a conclusion.
3. Indirectly, the executives who have made the estimation become responsible for its achievement also.
Demerits of executives opinion method
1. It is merely based on opinion rather than on facts and figures.
2. Objective analysis is not done.
3. It is a mere guess work and the approach is unscientific.
4. It is a general estimation of future sales and the prediction is not done area-wise, product-wise and customer-wise.
2. Sales Force Opinion Method
In this case, the sales representatives of the business are asked to forecast sales for their respective areas. Their views will be combined with those of the sales managers in arriving at an estimate. The sales representatives have sound knowledge of the trend in their respective sales territories and their views are important in sales forecast.
Merits of Sales force opinion method
1. It is a very practical approach.
2. Each sales territory gets focus.
3. The sales representatives who have made the estimation also become responsible for attaining the target.
Demerits of Sales force opinion method
1. The success of this approach depends on the efficiency of the sales people.
2. Some salesmen may be non-committal and may not give correct information.
3. Customers’ Expectation Method
Under this method, the customers are directly approached and their requirements in the near future are ascertained. This approach is particularly suitable in the case of industrial goods where the number of buyers is limited and can be personally contacted. In the case of consumer products, only sample approach is possible, as there are a large number of such buyers.
Merits of Customers’ expectation method
1. Firsthand information can be obtained.
2. This approach will certainly work in the case of industrial goods marketing.
Demerits of Customers’ expectation method
1. It may not give reliable information in the case of consumer goods marketing.
2. The expectations of the buyer may change in future.
3. Such an approach is suitable only to prepare short-term plans.
4. Statistical Method
Trend Analysis, a statistical tool, helps to Predict future sales based on the past sales figures of a business.
Merits of Statistical Method
1. It is an objective forecast.
2. No guess work is involved in it
3. It is simple to use.
Demerits of Statistical Method
1. It ignores market conditions.
2. It does not make provision for uncertainties.
Limitations of Sales Forecast
1. The tastes and preferences of the buyers do not remain constant. A sudden change in the preference of the buyers may render the forecasts meaningless.
2. The economic conditions prevailing in every country also do not remain stable. Purchasing power of money, desire to save and invest etc., are some of the important economic factors having a bearing on sales forecast.
3. The political conditions in a State also influence sales forecast. The policies of the Government regarding business change often. A sudden hike in excise duty or sales tax by the Government may affect sales.
4. The entry of competitors may also affect sales. A firm enjoying monopoly status may lose such a position if the buyers find the competitors’ products more superior.
5. Progress in science and technology may render the present technology obsolete. As a result, products which are right now enjoying a good market may lose market and the demand for products made using the latest technology will increase. This is particularly true in the case of market for electronic goods, computer hardware, software and so on.
Features of a good forecasting method
There are various methods of forecasting demand of product in market. Of them, some are very costly and a few are cheap. Some forecasting methods are flexible and some require skill and sophistication. Therefore, there is a problem of choosing the best method for a particular demand situation.
What are the criteria of a good forecasting method?
The management should have good understanding of the technique chose and they should have confidence in the technique adopted. Then only proper interpretation will be made.
According to Joel Dean, the plausibility requirements can often increase the accuracy of the result. Accuracy entails the executives to accept the results. Experienced executives will have a market feel and they can contribute effectively.
The method chosen should be of simple nature or ease of comprehension by the executives. Elaborate mathematical and econometric procedures are less desirable, if the management does not really understand what the forecaster is doing.
Cost is a primary consideration which should be weighed against the importance of the forecasts to the business operation. There is no point in adopting very high levels of accuracy at great expense, if the forecast has little importance in the business.
Immediate availability of data is a vital requirement in forecasting method. The technique should yield quick and meaningful result. Delay in result will adversely affect the managerial decision.
To conclude, the ideal forecasting method is the one which yields good returns and costs in accuracy meets new circumstances with flexibility.