by Christina Pomoni

Created on: September 26, 2009   Last Updated: November 06, 2009

Sales forecasting is a key management tool for businesses. The more effective the sales forecasts are the more accurate the firm's budgets will be, giving managers an accurate picture of future profitability and viability of the firm in the competitive marketplace.

Forecasting is broadly used by managers as a primary tool for predicting the volume of future sales and the level and type of future customer demand based on historical sales performance and projected market conditions. In this context, managers consider a wide spectrum of data for determining growing and profitable markets. Apart from customer demand, other variables used to produce sales forecasts are competitive strategies, pricing, research & development, advertising & marketing, processing times, supplier lead times, quality losses, technological changes and regulatory changes.

One of the major challenges in forecasting, as in most of business decisions, is the accurate prediction of customer demand. Forecasting customer demand is a difficult task, for the most part because the demand for goods and services varies greatly and is subject to seasonal and cyclical patterns that affect the level of demand for a firm's products or services. In particular, seasonal patterns cause an increase or decrease in customer demand, depending on the time of day, week, month, or season. For instance, the peak hours for a call center of a large bank are between 9:00 AM and 12:00 PM. The cyclical patterns of customer demand arise from influences in the business cycle that include factors that cause an economy to go from recession to expansion over a period of time. Business cycle movements are difficult to forecast because they are affected by political or economical developments on a national or a global level.

Typically, managers summarize the sales of the previous year into a chart and observe the monthly sales trends to identify the sales pattern. They notice months that sales are increased and months that sales are really low and they relate these trends to seasonal fluctuations that affect the company's sales such as holiday periods, promotion periods and so on. However, the underlying trend is more or less the same and this allows them to follow a specific pattern when creating the sales forecast for the next year.

Generally, sales forecasts are based on latest sales trends; economic trends within the sector, industry, region or nation the firm operates; and competitive developments. The factors

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