by Sudeepa Nair

Created on: March 13, 2009

Sales forecasting is required by any firm that sells a product or service. Forecasting helps to reduce inventory, fill customer orders without delay, schedule capacity, plan procurement, control costs and predict revenues. Sales forecasting is extremely important in a customer driven market, as it is, today.

Sales can be forecasted for the entire product group, called as volume forecasting, which is done for a long term horizon, typically 12 months or greater. It can also be done for individual products called as mix forecasting. The mix forecast is prepared for a short term horizon.

Forecasting is done by using inputs like current customers, potential customers, market share and pricing to predict the potential sales. These inputs can be classified into extrinsic and intrinsic factors. Extrinsic factors include customers both old and new, competition (market share), market regulations and other environmental, social or political factors. Intrinsic factors include pricing, promotions, discounts, management directives, new product lines and historical performance.

The simplest formula to forecast would be to multiply the customers * the number of products sold per customer*the price of the product. But a host of extrinsic and intrinsic factors, as explained before, make this a much more complicated exercise. The number of customers may not be the same, the number of products sold may change and the pricing too. To enable forecasters to factor in these variables, there are several forecasting models available where inputs can be provided to get the much looked forward numbers. The common techniques are time series analysis, regression analysis and the qualitative technique. Time series uses historical data to predict the future while methods like regression analysis allow forecasters to include the variable factors like consumer confidence in the economy, regulations etc. Qualitative methods incorporate intuitive judgments and opinions.

An important thing to note here is that forecasting is not simply deriving numbers through complex mathematical equations. The real test lies in providing a reasonable and rational forecast based on qualitative and subjective factors like the potential of the sales persons, consumer spending power, brand value etc. Although sales forecasting is the primary responsibility of the sales and marketing team, arriving at reasonable and rational numbers requires a collaborative exercise between all the departments in the organization. The sales and marketing team is accountable for the sales forecast as they know the customers and they are the ones to execute the sales plan. But a deliberation among all the departments is vital to avoid highly optimistic or highly pessimistic numbers for the year.

Most sales and management software packages include the sales forecasting functionality. A recent concept used by suppliers, manufacturers and retailers across the supply chain to improve the forecasts is Collaborative Planning, Forecasting and Replenishment (CPFR). In CPFR, information about customer demand is shared throughout the supply chain to arrive at more accurate forecasts, thus reducing inventory and cutting costs. Point of sale (POS) data is an important ingredient in CPFR which culminates into the sales forecast.

References: SALES FORECASTING A NEW APPROACH by Thomas F Wallace, Robert A Stahl

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