by Gautam Banerjee

Created on: September 25, 2009

A sales forecast is not only a prediction based on past or estimated sales performance but is also an analysis of expected market conditions. It provides business with an evaluation of past and current sales levels and tries to estimate future growth, in relation to industry norms. It helps making decisions with regard to policies and is an effective tool to monitor prices and operating costs which helps in estimating future profits.

Sales targets are derived from sales forecasts. They do not necessarily exactly match with the finally accepted forecasts as sales targets are motivational tools and may be set at a higher level than the forecast in order to stimulate salesmen to greater effort.

Sales forecasting methods and procedures vary from organization to organization but other considerations are taken into account. For example, the general economic environment and outlook in relation to the particular industry and the outlook for the particular company and its products in relation to competitor's marketing plans.

Forecasts also cover different time periods. In the short term forecast the operating budget forecast covers the immediate financial year to determine standard costs, prices and cash flow. In the long term, forecast are required for varying period of time to provide for major capital requirement, new market or product developments.

Basic forecasting methods may involve estimates or guesses by sales managers and analysis of internal data using regression analysis. Statistical techniques such as correlation analysis may be done to analyze company data related to external criteria such as economic conditions and industry trends. Beside statistical analysis additional information can be gathered by survey of buyer's intention by market research and inputs from sales personnel.

While analyzing internal data variations in demand due to seasonal factors, cyclical changes in consumption and cyclical changes in inventory should be taken into consideration, as also, changes in demand brought about by substitution or obsolescence. The extent of forecasting error should be considered keeping in view the cost of excessive stock holding or out-of-stock situations and delay in delivery. It is important to know the likely limits of error in forecasting because large inaccuracy can severely erode profits.

A simple example of sales forecasting for a small retail store run with bank finance will elaborate the above points.

The starting point for this would be to

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