Sales Forecasting; Every manufacturer makes an estimation of the sales likely to take place in the near future. It gives focus to the activities of a business enterprise. In the absence of sales forecast, a business has to work at random. Forecasting is one of the important aspects of administration. The comer-stone of successful marketing planning is the measurement and forecasting to market demand. The sales forecast is the estimate of the number of sales to be expected for an item/product or products for a future period of time. So, what we discussing is – Types, Importance, Advantages, and Limitations of Sales Forecasting.
The Concept of Forecasting explains Sales Forecasting by Types, Importance, Advantages, and Limitations.
In this article is discussing, Sales Forecasting: Types of Sales Forecasting, Importance of Sales Forecasting, Advantages of Sales Forecasting, and Limitations of Sales Forecasting. So, let’s discuss; Meaning of Sales Forecasting: Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Therefore, the sales forecast indicates as to how much of a particular product is likely to be sold in a specified future period in a specified market at the specified price. Accurate sales forecasting is essential for a business house to enable it to produce the required quantity at the right time.
Types of Sales Forecasting:
The following Types of Sales Forecasting below are:
Economic: This type of forecast is important to understand the general economic trend through a careful study of Five Year Plans, Gross national products. National income, Government expenditure, Unemployment, Consumer spending habits etc. This is in order to have an accurate forecast. Big companies, in India, adopt this method.
Industry: The future market demand is calculated through industrial forecast or market forecast. The expected sales forecasts of all the industries, in the same line of business are combined. Market demand may be affected by controllable-price, distribution, promotion, etc., and uncontrollable-demographic, economic, political, technological development, cultural activities etc. The executive must take into account all these conditions while forecasting.
Company: The third step goes to the firm concerned to look into the market share, for which forecast is to be made. By considering both controllable and uncontrollable, based on chosen marketing plans within the firm, with that of other industries, steps are taken in formulating forecasts.
There are three classes (Periods) of sales forecasts:
It is also known as operating forecast, covering a maximum of one year or it may be half-yearly, quarterly, monthly and even weekly. This type of forecasting can be advantageously utilized for estimating stock requirements, providing working capital, establishing sales quotas, fast-moving factors. It facilitates the management to improve and coordinate the policies and practice of Marketing-production, inventory, purchasing, financing etc. The short-run forecast is preferred to all types and brings more benefits than other types.
Purpose of Short-Term Forecasting:
- Production Policy: By knowing the future demand the decision regarding production policy can be taken so that there is no problem of overproduction and short supply of input materials.
- Material Requirement Planning: By knowing the future demand, the availability of the right quantity and quality of materials could be ensured.
- Purchase Procedure: The purchase programme could be decided depending on the material requirements.
- Inventory Control: Proper control of inventory could be ensured so that inventory carrying cost is minimum or optimum.
- Equipment Requirement: The decision regarding procurement of new equipment in view of the capacity and capability of the existing equipment can be taken.
- Man-Power Requirement: The decision regarding recruitment of extra labor on the full time or part time could be taken.
- Finance: The arrangement of funds for the purchase of raw materials, machines, and parts could be made.
This type of forecast may cover from more than one year to two or four years. This helps the management to estimate probable profit and control over budgets, expenditure, production etc. The factors-price trend, tax policies, institutional credit etc., are specially considered for a good forecast.
This type of forecast may cover one year to five years, depending on the nature of the firm. Seasonal changes are not considered. The forecaster takes into account the population changes, competition changes, economic depression or boom, inventions etc. This type is good for adding new products and dropping old ones. The forecasting that covers a considerable period of time, such as 5, 10, 20 years is called long-term forecasting.
The period no doubt depends upon the nature of business or type of the product the firm is engaged in manufacturing. In many industries like steel plants petroleum refinery or paper mills where the total investment for the equipment/infrastructure is quite high, long-term forecasting is needed.
Purposes of Long-Term Forecasting:
- To plan for the new unit of production, or expansion of the existing unit or diversification of lines of production or shut down of the existing units depending upon the level of demand.
- To plan the long-term financial requirement for various needs.
- To make proper arrangement for training the personnel so that manpower requirement of desired expertise can be met in future.
Importance of Sales Forecasting:
The following Importance of Sales Forecasting below are:
- Supply and demand for the products can easily be adjusted, by overcoming temporary demand, in the light of the anticipated estimate; and regular supply is facilitated.
- A good inventory control is advantageously benefited by avoiding the weakness of understocking and overstocking.
- Allocation and reallocation of sales territories are facilitated.
- It is a forward planner as all other requirements of raw materials, labor, plant layout, financial needs, warehousing, transport facility etc., depend in accordance with the sales volume expected in advance.
- Sales opportunities are searched out on the basis of forecast; mid thus discovery of selling success is made.
- It is a gear, by which all other activities are controlled as a basis of forecasting.
- Advertisement programmes are beneficially adjusted with full advantage to the firm.
- It is an indicator to the department of finance as to how much and when finance is needed; it helps to overcome difficult situations.
- It is a measuring rod by which the efficiency of the sales personnel or the sales department, as a whole, can be measured.
- Sales personnel and sales quotas are also regularized-increasing or decreasing-by knowing the sales volume, in advance.
- It regularizes productions through the vision of sales forecast and avoids overtime at high premium rates. It also reduces idle time in manufacturing.
- As is the sales forecast, so is the progress of the firm. The master plan or budget of a firm is based on forecasts. “The act of forecasting is of great benefit to all who take part in the process and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a unified front, an understanding of the reasons for decisions, and a broadened outlook.”
- Sales forecast enables all the departments of the business to work together in proper coordination and cooperation.
- Sales forecast helps in product mix decisions as well. It enables the business to decide whether to add a new product to its product line or to drop an unsuccessful one.
- The sales forecast is a commitment on the part of the sales department and it must be achieved during the given period, and.
- It helps in guiding marketing, production and other business activities for achieving these targets.
Advantages of Sales Forecasting:
Sales are the lifeblood of every company. The advantages of forecasting your company’s sales lie mainly in giving you a firm idea of what to expect in the coming months. A standard sales forecast looks at conditions present in your business during previous months and then applies assumptions regarding customer acquisition, the economy and your product and service offerings. Forecasting sales identify weaknesses and strengths before you set your budget and marketing plans for the next year, allowing you to optimize your purchasing and expansion plans.
The following Advantages of Sales Forecasting are four types;
- Cash Flow.
- Planning, and.
Limitations of Sales Forecasting:
In certain cases forecast may become inaccurate. The failure may be due to the following factors:
Changes are throughout. Present style may change any time. It is difficult to say as to when a new fashion will be adopted by the consumers and how long it will be accepted by the buyers. If our product is similar to fashion and is popular, we are able to have the best result; and if our products are not in accordance with the fashion, then sales will be affected.
Lack of Sales History:
A sales history or past records are essential for a sound forecast plan. If the past data are not available, then the forecast is made on guess-work, without a base. Mainly a new product has no sales history and forecast made on guess may be a failure.
Consumer’s attitude may change at any time. The forecaster may not be able to predict exactly the behavior of consumers. Certain market environments are quick in action. Even rumors can affect market variables. For instance, when we use a particular brand of soap, it may generate itching feeling on a few people and if the news spread among the public, sales will be seriously affected.
It is possible that the growth may not remain uniform. It may decline or be stationary. The economic condition of a country may not be favorable to the business activities-policies of the government, the imposition of controls etc. It may affect the sales.
Basic Limitations of Sales Forecasting;
- The tastes and preferences of the buyers do not remain constant. A sudden change in the preference of the buyers may render the forecasts meaningless.
- The economic conditions prevailing in every country also do not remain stable. The purchasing power of money, desire to save and invest etc., are some of the important economic factors having a bearing on sales forecast.
- The political conditions in a State also influence sales forecast. The policies of the Government regarding business change often. A sudden hike in excise duty or sales tax by the Government may affect sales.
- The entry of competitors may also affect sales. A firm enjoying monopoly status may lose such a position if the buyers find the competitors’ products more superior.
- Progress in science and technology may render the present technology obsolete. As a result, products which are right now enjoying a good market may lose the market and the demand for products made using the latest technology will increase. This is particularly true in the case of the market for electronic goods, computer hardware, software and so on.
The methods of forecasting discussed above have respective merits and demerits. No single method may be suitable. Therefore, a combination method is suitable and may give a good result. The forecaster must be cautious while drawing decisions on sales forecast. Periodical review and revision of sales forecast may be done, in the light of performance. A method which is quick, less costly and more accurate may be adopted.