Factors to consider in Sales Forecasting
Historical Perspective – As a starting point, management analyzes previous sales experience by product lines, territories, classes of customers, and other relevant details. Management needs to consider a time line long enough to detect trends and patterns in the growth and the decline of dollar sales volume. This period is generally five to ten years. If the company’s experience with a particular product class is shorter, management will include visible experience of like companies.
Business Competence – The ability of a company to respond to the results of a sales forecast depends on its production capacity, marketing methods, financing, and leadership, and its ability to change each of these to maximize its profit potential.
Market Position – Forecasting also considers the competitive position of the company with respect to its market share; research and development; quality of service, pricing and financing policies; and public image. In addition, forecasters also evaluate the quality and quantity of the customer base to determine brand loyalty, response to promotional efforts, economic viability, and credit worthiness.
General Economic Conditions – Although consumer markets are often characterized as being increasingly susceptible to segmentation in recent years, the condition of the overall economy is still a primary determinant of general sales volume, even in many niche markets. Forecasters incorporate relevant data that correlate well or demonstrate a causal relationship with sales volume.
Price Index – If the prices for products have changed over the years, changes in dollar volume of sales may not correlate well with volume of units. At one point in time when demand is strong, a company raises its prices. At another time, a company may engage in discounting to draw down inventories. Therefore, accountants devise a price index for each year which compensates for price increases. By dividing the dollar volume by the price indexes, a company can track its “true” volume growth. This process is similar to an inflation index, which provides prices in constant dollars. As a result, management is able to compare the price-adjusted dollar sales volumes.
Intra-Company Trends – By analyzing month-to-month trends and seasonal variations over both the long and short terms, small business owners and managers can adjust the sales forecast to anticipate variations that historically repeat themselves during budget periods. Management may then construct a budget reflecting these variations, perhaps increasing volume discounts during traditionally slow periods, exploring new territories, or having sales representatives solicit product and service ideas from current customers.
Product Trends – Forecasters also trend individual products, using indexes to adjust for seasonal fluctuations and price changes. Product trends are important for understanding the life cycle of a product.
