What is Sales Forecasting?

Sales forecasting is a projection of expected customer demand for the product or service at a company and it is calculated for a specific time period. Here we are sharing a detailed article on Sales Forecasting. its meaning, types, methods, and techniques of the sales forecast.

► What is Sales Forecasting?

Sales forecasting is used for business planning, sales, marketing, and management decision-making.

Sales forecasting is the process of estimating what future sales may reach your company. Companies use techniques of sales forecasting to predict weekly, monthly, quarterly, and annual revenue and break-even point.

◉ Sales Forecasting Meaning

Sales forecasting simply means predicting or calculating how many products or services your company could sell over a period of time.

Definition of Sales Forecasting

According to Cundiff and Still,

“Sales forecasting is an estimate of sales for a specified future period that is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces.”

According to Philp Kotler (Father of Marketing),

“Sale Forecasting is the expected level of sales of the company based on a chosen marketing plan and assumed marketing environment.”

► Importance of Sales Forecasting

Companies use sales forecasting as it has significant importance in factors such as follows;

  • Sales Planning
  • Better optimization of Cash flow
  • Better Resource planning
  • Demand forecasting
  • Inventory management
  • Supply chain management
  • Understanding customers better and their choices
  • Identify the market trends and sales pattern
  • Determine expected ROI to boost sales

► Methods of Sales Forecasting (Techniques)

There are various methods or techniques of Sales Forecasting. These methods are mainly divided into two categories;

  1. Qualitative Methods
  2. Quantitative Methods 

1. Qualitative Method

  • Salesforce Opinion Method
  • Delphi Technique
  • Sales force composite method
  • Survey of Buyers’ Expectational

2. Quantitative Methods

  • Historical Analogy Method
  • Test Marketing
  • Time Series Analysis
  • Moving Average Method
  • Regression Analysis

Now let’s discuss all the methods and techniques of Sales forecasting in detail.

1. Qualitative Method

Salesforce Opinion Method

In Sales Team Opinion Method, the Senior Manager asks his team for input on expected demand from each team leader of the sales team.

  • Each team leader and Area Sales Manager estimate the respective region and product categories and present customer demand.
  • Finally, the Head of the Sales Teams analyzes all the estimations and generates the final version of the demand forecast.

Delphi Technique

The Delphi technique is a method of sales forecasting in which a panel of forecasting experts generates a demand forecast where each expert makes a forecast of a specific segment.

  • Once the initial forecasting round is finished, each expert shares the forecast with the management or as the process requires, is influenced by others.
  • After reviewing all forecasts, all participants again make a consequent forecast and the process repeats until they all reach a near consensus scenario.

Sales Force Composite Method

The sales force composite method involves sales persons estimating their future sales. It is based on a bottom-up approach and is also known as the grassroots approach.

  • In this method, each salesperson estimates in his sales territory how much quantity or units potential customers will buy.
  • The sales forecast is made up of a composite of all the sales persons. These estimates are collectively reviewed at a higher management level.
  • This method is often used by industrial or manufacturing businesses.

Survey of Buyers’ Expectations (Market Survey)

In this method, a representative from the company asks existing and potential customers about their likely purchases of the company’s product or services for the forecast period.

  • This method is also known as market research or market survey.
  • Most all company conduct periodic market surveys of consumer buying intentions.
  • Market research studies seek personal, demographic, interest, and financial information from end-users by asking questions.
  • This method is useful for products that have little to no demand history.

2. Quantitative Methods

Historical Analogy Method

The historical analogy method is used where a demand forecast may be derived by using the history of a similar product.

  • Multiple equivalence groups of analogous series are made to make a more accurate forecast than what can be made with a single series or judgment alone.
  • In this method, existing products or generic products could be used as a model for the main product. For example, demand for CDs is caused by DVD players.

Test Marketing

The Test Marketing method is used to forecast the demand or sales for a new product that has yet not been officially launched in the market.

  • In this method, a test is selected. It may be a region, city, or state which is representative of the total market.
  • After the selection of the test area, that new product will be launched in the area.
  • If the product is successful in the test area, then the forecast will be that similar levels of success will be achieved in the total market.

Time Series Analysis

In the time series method, a set of observations on a quantitative variable is collected over a period of time.

  • For example historical data on sales, inventory, and the number of repeat customers.
  • Analysis of the past behavior of a variable is done in order to predict its future behavior.
  • Time Series Analysis is very useful for short-term demand or sales forecasting.
  • Mostly used in fast-moving consumer goods (FMCG) & commodity markets.

Moving Average Method

The simple moving average model assumes an average is a good estimator of future behavior. The formula for the simple moving average is given below.

moving average method of sales forecasting

Regression Analysis

Once a linear relationship is defined, the independent variable can be used to forecast the dependent variable.

  • Determine the dependent and independent variables
  • Develop scatter plots and determine if linear or nonlinear relationships exist. Calculate a correlation coefficient. Transform nonlinear data.
  • Run an autocorrelation and interpret the results – it will be helpful to see if any pattern exists.
  • Compute the regression equation. Interpret.
  • Understand the difference between the standard error of estimate, standard error of forecast (regression), and standard error of the regression coefficient.
  • Evaluate and interpret the adjusted R-square
  • Test as the independent variable for significance
  • Evaluate the ANOVA and test the model for significance (F and DW)
  • Plot the error terms
  • Calculate a prediction and prediction interval
  • State Final conclusion about the model (if running different models, compare using MSE, MAD, MAPE, MPE)

► Benefits of Sales Forecasting

  • Improves Inventory Control
  • Helps to determine gaps in resources
  • Aids planning marketing strategy
  • It helps in preparing the Sales Budget
  • It is fairly accurate

Limitation of Sales Forecasting

  • It is based on prediction and sometimes guesswork.
  • The forecast may be wrong if research data is inaccurate.
  • If the Sales Manager has a vested interest then It may be biased.
  • It is time-consuming and expensive.
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