Sales forecasting is easy to calculate, simple math that is immensely useful to any marketing organisation irrespective of size. It is not guessing the future correctly but making assumptions on management of the future revenue of the organisation.
This important act not only sets goals for the marketing and sales teams but also provides useful information for manufacturing and or importing products. An organisation can effectively do budgeting and management of the finances along with many other tasks by reviewing and revising forecasts regularly.
The sales forecast of the organisation can be considered the backbone of the business. Whether the organisation is small, medium, and large or a conglomerate, the success and the growth are measured by its revenue, predominantly based on sales.
The forecasts set standards for most of the activities in the establishment including expenditure, costs, profits, and growth. It is always the set of initial numbers that will help to position all other activities. When an organisation tracks the forecast against the actual, prevailing position of the organisation can be understood clearly.
The trend in Sri Lanka is that almost all large scale organisations are engaged in sales forecasting while most of the smaller organisations virtually neglect this important practice.
This happens mainly due to the unawareness of the significance of the information generated through sales forecasting. If entrepreneurs can be made to understand that the set of numbers created by the forecast is the key to the short term planning and preparations, every single person willingly does sales forecasting.
Key benefits
Before discussing the methods, let us look at some of the key benefits if a sales forecast is created for a marketing company. Main among them is that a sales forecast is the foundation of the planning process in any revenue-generating organisation. The rationale of sales forecasting is to plan to achieve the anticipated sales volumes, which is the lifeline of the company. The sales forecast is the first guideline for an organisation. The rest of the activities can be planned based on the forecast.
Companies that practise forecasting allocate resources in functional areas usually by using data derived from sales forecasts. For example, a production unit can use these forecasts to make production schedules and quantity requirements. Similarly, finance can use it to set budgets and make cash flow projections that are immensely useful. HR uses them to determine future recruitment on the information provided and marketing can make use of the data provided to allocate resources to various marketing functions.
Another key benefit from sales forecasting is the assistance provided to the all-important sales management function and the sales success of the organisation. Good sales forecasts provide information where the customers are located and predict their buying levels and patterns. It also helps setting up territories, determining sales goals, and comparing the performance of the individual sales people.
More benefits
There are many more benefits with a proper sales forecast. Important among them is the facilitation it provides for purchasing, logistics, and inventory control, all that is connected to the general functioning of the organisation. In the matter of sales, the forecast assists in the expansion of business activities and diversification. A good sales forecast can set standards for sales and monitor actual results effectively. The forecast can also be helpful to coordinate various external factors.
Forecasting can be done with either complex mathematical formula which is practised by large companies with production facilities. However, as for the Sri Lankan market, simple, easy-to-understand and pragmatic forecasting methods are adequate. Let us look at a few simple forecasting methods available for small and medium-size business enterprises.
Using ‘Executive opinion’ is probably the oldest, but an effective way to do a good forecast. Usually, a team of seniors in the organisation engage in this exercise. The selected executives should possess a good knowledge about market factors.
They get together and create a set of figures for future sales in a specified period, based on their experience. The collective experience is pooled together to develop figures for the forecast. Although the figures may not be accurate in the absence of actual data, this is probably the simplest and the quickest method to start with.
‘Salesforce opinion’ is a straightforward and easy method of forecasting sales. Under this, salesmen are used to make estimates in their territories. They get in touch with customers and prospects and obtain their opinion to make estimates on demand trends.
The information can be processed and integrated to fathom the sales volumes of the whole market for the target period. Even though a broad outlook is absent, this method provides more information in terms of products, territories, customers, and selling situations.
A combination of the ‘executive opinion’ and ‘sales force opinion’ methods can provide a more effective and more accurate sales forecast when the information, experience, and ground-level facts are shared. It also can give better control over the sales force opinion which can be subjective.
‘Past sales’ analysis or historical data method is another valuable uncomplicated system for a sales forecast unless the products are newly introduced to the market. This method is based on personal judgments of the team or individual. Past sales figures are mathematically accurate, and statistical and quantitative formulas can be deployed to calculate future sales.
Usually, the previous year’s sales are extended to the following year and the forecasting can be done monthly adding reasonable percentages to the past year’s performance.
Companies can use ‘Expert opinion’ by way of research by a consultancy agency if such an organisation is willing to spare a substantial amount of funds. This is typically somewhat more expensive than in-house efforts. Although this exercise can be expensive, these agencies possess specialised expertise in the respective fields.
They conduct market research and compile statistical data. They collect market and other important data from the actual market, obtain first-hand field information of various sources, and prepare sales forecasts. The demerit is that the success of the forecast depends on the competency of the deployed experts.
Several other forecasting methods are used by companies around the world, such as ‘Test Marketing’, ‘Consumer Buying Plan’ ‘Market Factor Analysis’, and statistical methods.
Having discussed the benefits and the methods of the forecast, one must realise that there are limitations in sales forecasting as well.
The economic conditions of the country and the territory can change without warning. The best example is the recent Covid-19 pandemic where all forecasts and predictions were forced to be readjusted. Forecasts can also be spoilt by sudden changes in government policies.
The recent government decision to restrict or ban a series of selected products is a good example. Besides, the entry of formidable competitors can lead to adjustments in sales forecasts. Advancement of technology also can make forecasts obsolete as the products can be chased out from markets.