# SALES FORECASTING NOTES

SALES FORECASTING

A company can forecast sales either by forecasting market sales (called market forecasting) and then determining what share of this will accrue to the company or by forecasting the company’s sales directly. The point is that planners are only interested in forecasts when the forecast comes down to individual products in the company.

We now examine the applicability and usefulness of the short-, medium- and long-term forecasts in so far as company planners are concerned and look at each from individual company departmental viewpoints.

1. Short-term forecasts. These are usually for periods up to three months ahead and are really of use for tactical matters such as production planning. The general trend of sales is less important here than short-term fluctuations.
2. Medium-term forecasts. They are of most importance in the area of business budgeting, the starting point for which is the sales forecast. Thus, if the sales forecast is incorrect, then the entire budget is incorrect. Forecasting is the responsibility of the sales manager. Such medium-term forecasts are normally for one year ahead.
3. Long-term forecasts. These are usually for periods of three years and upwards depending on the type of industry being considered. In industries such as computers three years is considered long-term, whereas for steel manufacture ten years is a typical long-term horizon. They are worked out from macro-environmental factors such as government policy, economic trends, etc. Such forecasts are needed mainly by financial accountants for long-term resource implications and are generally the concern of boards of directors.

Forecasting techniques

They are classified into two, namely:

• Qualitative techniques
• Quantitative techniques

Qualitative techniques

Qualitative forecasting techniques are sometimes referred to as judgmental or subjective techniques because they rely more on opinion and less on mathematics in their formulation. They are often used in conjunction with the quantitative techniques. These techniques includes:

• Forecast by analogy
• Delphi method
• Technology forecasting
• Statistical surveys
• Scenario building composite forecasts

Consumer/user survey method

This method involves asking customers about their likely purchases for the forecast period, sometimes referred to as the market research method. For industrial products, where there are fewer customers, such research is often carried out by the sales force on a face-to-face basis. The only problem is that then you have to ascertain what proportion of their likely purchases will accrue to your company. Another problem is that customers (and salespeople) tend to be optimistic when making predictions for the future. Both of these problems can lead to the possibility of multiplied inaccuracies.

This method is of most value when there are a small number of users who are prepared to state their intentions with a reasonable degree of accuracy. It tends, therefore, to be limited to organizational buying. It is also a useful vehicle for collecting information of a technological nature which can be fed to one’s own research and development function.

Panels of executive opinion

This is sometimes called the jury methods, where specialists or experts are consulted who have knowledge of the industry being examined. Such people can come from inside the company and include marketing or financial personnel or, indeed, people who have a detailed knowledge of the industry. More often, the experts will come from outside the company and can include management consultants who operate within the particular industry. Sometimes external people can include customers who are in a position to advise from a buying company’s viewpoint. The panel thus normally comprises a mixture of internal and external personnel.

Sales force composite

This method involves each salesperson making a product-by-product forecast for their particular sales territory. Thus individual forecasts are built up to produce a company forecast; this is sometimes termed a ‘grass-roots’ approach. Each salesperson’s forecast must be agreed with the manager and divisional manager where appropriate, and eventually the sales manager agrees the final composite forecast.

Such a method is a bottom-up approach. Where remuneration is linked to projected sales (through quotas or targets) there can be less cause for complaint because the forecast upon which remuneration is based has been produced by the sales force itself.

-Delphi method

-Product testing and test marketing

Quantitative techniques

Quantitative forecasting techniques are sometimes termed objective or mathematical techniques as they rely more upon mathematics and less upon judgment in their computation. These techniques are now very popular as a result of sophisticated computer packages, some being tailor-made for the company needing the forecast.

Quantitative techniques can be divided into two types:

1. Time series analysis. The only variable that the forecaster considers is time. These techniques are relatively simple to apply, but the danger is that too much emphasis might be placed upon past events to predict the future. The techniques are useful in predicting sales in markets that are relatively stable and not susceptible to sudden irrational changes in demand. In other words, it is not possible to predict downturns or upturns in the market, unless the forecaster deliberately manipulates the forecast to incorporate such a downturn or upturn.
2. Causal techniques. It is assumed that there is a relationship between the measurable independent variable and the forecasted dependent variable. The forecast is produced by putting the value of the independent variable into the calculation. One must choose a suitable independent variable and the period of the forecast to be produced must be considered carefully. The techniques are thus concerned with cause and effect. The problem arises when one attempts to establish reasons behind these causes and effect relationships; in many cases there is no logical explanation. Indeed, there is quite often nothing to suppose that the relationship should hold good in the future.

Levels of forecasting

Forecasts can be produced for different horizons starting at an international level and ranging down to national levels, by industry and then by company levels until we reach individual product-by-product forecasts. The forecast is then broken down seasonally over the time span of the forecasting period and geographically right down to individual salesperson areas. These latter levels are of specific interest to sales management, for it is from here that the sales budgeting and remuneration systems stem.

However, companies do not generally have to produce international or national forecasts as this information is usually available from recognized international and national sources. The company forecaster finds such data useful for it is by using such information that product-by-product forecasts can be adjusted in the light of these macro-level predictions. It is also from these market forecasts that the company can determine what share it will be able to achieve through its selling and marketing efforts. These marketing efforts involve manipulating the marketing mix in order to plan how to achieve these forecasted sales (e.g. a price reduction could well mean more sales will be possible). Once it reaches a detailed level of product-by-product forecasting, geographically split over a time period, it is then termed the ‘sales forecast’, which is more meaningful to sales management. Indeed, it could be said that this is the means through which sales management exercises control over the field sales force and, this is the revenue-generating mechanism for the entire sales organization of a company.

Sales force evaluation

The sales force evaluation process

Sales force evaluation is the comparison of sales force objectives with results. It begins with the setting of sales force objectives which may be financial, such as sales revenues, profits and expenses; market-orientated, such as market share; or customer-based such as customer satisfaction and service levels. Then, the sales strategy must be decided to show how the objectives are to be achieved. Next, performance standards should be set for the overall company, regions, products, salespeople and accounts. Results are then measured and compared with performance standards. Reasons for differences are assessed and action taken to improve performance.

Sources of Information

Management can obtain information about reps in several ways, including sales reports, personal observation, customer letters and complaints, customer surveys, and conversations with other sales representatives. Many companies require their representatives to develop an annual territory marketing plan in which they outline their program for developing new accounts and increasing business from existing accounts.

This type of report casts sales reps into the role of market managers and profit centers.

Sales managers study these plans, make suggestions, and use them to develop sales quotas.

Sales reps write up completed activities on call reports and, in addition, submit expense reports, new-business reports, lost-business reports, and reports on local business and economic conditions. These reports provide raw data from which sales managers can extract key indicators of sales performance: (1) average number of sales calls per rep per day, (2) average sales call time per contact, (3) average revenue per sales call, (4) average cost per sales call, (5) entertainment cost per sales call, (6) percentage of orders per hundred sales calls, (7) number of new customers per period, (8) number of lost customers per period, and (9) sales force cost as a percentage of total sales.

Formal Evaluation

There are several approaches to conducting evaluations. One type of evaluation compares the rep’s current performance to that individual’s past performance and to overall company averages on key sales performance indicators. These comparisons help management pinpoint specific areas for improvement. For example, if one rep’s average gross profit per customer is lower than the company’s average, that rep could be concentrating on the wrong customers or not spending enough time with each customer.

Evaluations can also assess the rep’s knowledge of the firm, products, customers, competitors, territory, and responsibilities; relevant personality characteristics; and any problems in motivation or compliance. As indicated earlier, an increasing number of companies are measuring customer satisfaction not only with their product and customer support service, but also with their salespeople. The sales manager can also check that salespeople know and observe the law. For example, under U.S. law, salespeople’s statements must match the product’s advertising claims. In selling to businesses, salespeople may not offer bribes to purchasing agents or others influencing a sale; they may not obtain or use competitors’ technical or trade secrets through bribery or industrial espionage. Finally, salespeople must not disparage competitors or competing products by suggesting things that are not true

The purpose of evaluation

The prime reason for evaluation is to attempt to attain company objectives. By measuring actual performance against objectives, shortfalls can be identified and appropriate action taken to improve performance. However, evaluation has other benefits.

Evaluation can help improve an individual’s motivation and skills. Motivation is affected since an evaluation programme will identify what is expected and what is considered good performance. Second, it provides the opportunity for the recognition of above-average standards of work performance, which improves confidence and motivation. Skills are affected since carefully constructed evaluation allows areas of weakness to be identified and effort to be directed to the improvement of skills in those areas.

Thus, evaluation is an important ingredient in an effective training programme.

Further, evaluation may show weaknesses, perhaps in not devoting enough attention to selling certain product lines, which span most or all of the sales team.

This information may lead to the development of a compensation plan designed to encourage salespeople to sell those products by means of higher commission rates.

Evaluation provides information that affects key decision areas within the sales management function. Training, compensation, motivation and objective setting are dependent on the information derived from evaluation.

THE SALES BUDGET

The sales budget may be said to be the total revenue expected from all products that are sold, and as such this affects all other aspects of the business. Thus, the sales budget comes directly after the sales forecast.

It can be said that the sales budget is the starting point of the company budgeting procedure because all other company activities are dependent upon sales and total revenue anticipated from the various products that the company sells. This budget affects other functional areas of the business, namely finance and production, because these two functions are directly dependent upon sales.

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