What Is Sales Forecasting Marketing Essay

What Is Sales Forecasting Marketing Essay Forecasting is a little more scientific than looking into the crystal ball . The scientific basis of forecasting lies in studying past , present and future trends , present and future actions and their effects . What happened in the past is relevant to what is happening now and what could happen in the future . Forecasting  is defined as the process of making statements about the events whose actual outcomes have not yet been observed . A common example might be  the estimation  of some variable of interest at some specified future date .  Prediction  is similar , but it is more general term. Both might refer to formal statistical methods employing   the time series ,  cross sectional  or  longitudinal  data and alternatively to less formal judgemental methods . Usage can differ between areas of application for example in  hydrology , the terms forecast and forecasting are sometimes reserved for the estimation of values at certain specific  future  times , while the term prediction is used for more general estimates , such as the number of times the floods will occur over a long period . WHAT IS SALES FORECASTING ? SALES FORCATING : Sales forecasting is estimating what a companys future sales are likely to be , based on the sales records as well as  the market research . Information used for sales forecasting must be well organized and may include information on the competition and the statistics that affect the businesses customer base . Companies conduct sales forecasting in hopes of identifying the patterns so that the revenue and the   cash flow  can be maximized . Sales forecasting is a difficult area of management . Most managers believe that they are good at forecasting . However , forecasts made usually turn out to be wrong . Marketers argue about whether sales forecasting is a science or an art . The short answer is that it is a bit of both. Sales forecast should be conducted regularly and all the forecasting results need to be measured , so that the future methods can be adjusted if necessary . Before the forecasting process begins marketing , sales or other managers should determine how far ahead the forecast should be done . Short term forecasting is a maximum of three months and is often effective for analyzing budgets and markets . Intermediate sales forecasting is between a period of three months and two years and may be used for schedules ,  inventory and production . Long term forecasting is for a minimum of two years and can be used for long term forecast period and is good for dealing with growth into new markets or new products . Basically sales forecasting is analyzing all the parts of a business from total inventory to the strengths and weaknesses of sales people . Managers must think about changes in customer sales or other changes that could affect the forecasting figures . They must be competitive when they are assessing the competition and how they can surpass the competition to better meet the needs of the target market . IMPORTANCE OF SALES FORCASTING Sales forecasting is the basis of all the business activities . All the business activities may it be a sales related matter , production related matter , finance , advertising etc depend on sales forecasting . Any business firm starts its plan with sales forecasting . Sales forecasting is a self assessment tool for a company . A sales forecast reports , graphs and analyzes the pulse of any business . It is a vital basis for a companys budget . The future direction of the company depends on the sales forecasting .   Sales  are the lifeblood of the business .  Its what helps you pay employees , cover operating expenses , buy more inventory , market new products and attract more investors . Sales forecasting is a crucial part of the  financial planning  of the business . Its a self assessment tool that uses the past and the current sales statistics to intelligently predict the future performance . Sales forecasts are also an important part of starting a new business . Almost all new businesses need loans or start up capital to purchase everything necessary to get off the ground office space , equipment , inventory , employee salaries and  marketing . You cant just walk into a bank with a bright idea and lots of enthusiasm . You need to show them numbers that prove your business is viable . In other words , you need a business plan . The importance of Sales forecasting can be stated as follows : 1 . Overstocking and the under stocking of materials can be maintained by a good inventory control. 2 . With the help of sales forecasting , sales opportunities can be found out on the basis of the forecast . 3 . All the activities in an organization , are controlled on the basis of forecasting . 4 . Advertising and sales promotion expenses are based on sales forecasting . 5 . Sales forecasting is also important in the field of personnel department . The number of sales persons , executives etc can be increased or decreased on the basis of sales forecasting . 6 . Sales forecasting is the basis for financial Planning . 7 . In the field of production , with the help of sales forecasting , producer is able to adjust his production schedules and avoid idle time which leads to efficiency . 8 . Supply and demand of the products can be easily adjusted .   9 . It helps in knowing when and how much to buy . 10 . It helps in the product mix decisions . SALES FORECASTING ON THE BASIS OF PAST Many businesses prepare their sales forecast on the basis of their past sales . Past years Sales forecasting is done with the help of Time series analysis . Time series analysis involves the breaking of past sales down into the four components : The trend are the sales growing , flat lining or are in decline ! Seasonal or cyclical factors Sales are affected by the swings in the general economic activity . Seasonal and cyclical factors occur in a regular pattern . Erratic events these include strikes , fashion fads , war scares and other disturbances to the market , which need to be isolated from the past sales data in order to be able to identify the more normal pattern of the sales . Responses the results of the particular measures that have been taken to increase the sales (e.g. a major new advertising campaign) . Using the time series analysis to prepare an effective sales forecast requires the management to : Smooth out the erratic factors . Adjust for the seasonal variation . Identify and estimate the effect of the specific marketing responses . SALES FORECASTING ON THE BASIS OF PRESENT MARKET As a starting point for estimating the market demand , a company needs to know the actual industry sales that is taking place in the market . This involves identifying its competitors and estimating their sales . An industry trade association will often collect and publish the total industry sales , although rarely listing the individual company sales separately . By using this information , each company can easily evaluate its performance against the whole market . This is an important piece of analysis , Say for example that Company A has sales that are rising at the rate of 10% per year . However , it finds out that the overall industry sales are rising by the rate of 15% per year . This must mean that Company A is losing the market share , its relative standing in the industry . Another way to estimate the sales is to buy the reports from a marketing research firm such as AC Neilsen , Mintel etc . These are usually good sources of information for the consumer markets where the retail sales can be tracked in great detail at the point of sale . Such sources are less useful in the industrial markets which usually rely on the distributors. SALES FORECASTING FOR FUTURE MARKET So far we have identified that how a company can determine the current position . How can the future market demand and the company demand be forecast ? Very few products or the services lend themselves to easy forecasting . These tend to involve a product whose absolute level or the trend of sales is fairly constant and where the competition is either non-existent ( e.g. monopolies such as public utilities ) or stable ( pure oligopolies ) . In most of the markets , the total demand and company demand are not stable which makes the good sales forecasting a critical success factor . A common method of preparing the sales forecast has three stages : Prepare the macroeconomic forecast   what will happen to overall economic activity in the relevant economies in which a product is to be sold . Prepare an industry sales forecast   what will happen to overall sales in an industry based on the issues that influence the macroeconomic forecast . Prepare a company sales forecast   based on what management expect to happen to the companys market share . Sales forecasts can be based on the following three types of information : What the customers say  about their intentions to continue buying products in the industry . What the customers are actually doing  in the market . What the customers have done  in the past in the market . There are many market research businesses that undertake surveys of the customer intentions and sell this information to the businesses that need the data for sales forecasting purposes . The value of the customer intention survey increases when there are a relatively small number of customers , the cost of reaching them is small and they have the clear intentions . An alternative way of measuring the customer intentions is to sample the opinions of the sales force or to the consult industry experts .