Chapter 5
Sales Forecasting
and Budgeting
PowerPoint presentation prepared by
Dr. Rajiv Mehta
New Jersey Institute of Technology
Chapter Outline
• Sales Forecasting and Its Relationship to
Operational Planning
• Forecasting Approaches and Techniques
• Evaluating Forecasting Approaches
• Sales Budget Planning
• Preparing the Annual Sales Budget
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Learning Objectives
After reading this chapter, you should be able to do
the following:
1. Relate sales forecasting to operational planning.
2. Use the most popular quantitative and qualitative sales
forecasting tools.
3. Evaluate the various sales forecasting techniques.
4. Identify the purpose and benefits of sales budgets.
5. Prepare an annual sales budget.
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Sales Forecasting and Its
Relationship to Operational Planning
•
A sales forecast is a prediction of
the future market potential for a
specific product. It sets the sales
expectations for a given time
period and can indicate what types
of products customers are likely to
want.
• Market potential is a quantitative
estimate, in either physical or
monetary units, of the total sales
for a product within a market.
• Sales potential is the portion of
market potential that one among a
set of competing firms can
reasonably expect to obtain.
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Reasons Why Forecasting Is Important
• sales and marketing
planning
• production scheduling
• cash flow projections
• financial planning
• capital investment
• procurement
• inventory management
• human resource planning
(hiring salespeople)
• budgeting
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Impact of Erroneous Sales Forecasts
Forecast
Functional area
Too high
Too low
Production
excess output, unsold
products
inadequate output to meet
customer demand
Inventory
Finance
Promotion
overstock
understocks
idle cash
cash shortage
wasted expenditures
insufficient expenditures to
cover the market
Distribution
costly, insufficient to sell
excess products
inadequate to reach market
Pricing
reductions to sell excess
products
price increases to allocate
scarce products
Sales force
too many salespeople, high
selling costs
too few salespeople, market
not covered
Customer
relations
money wasted on unneeded
activities, resulting in lower
profits
unsatisfactory due to out-ofstock products
Profits
lower unit profits since
expenses are high
lower total profits because
market not covered
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Sales and Operational
Planning Process (S&OP)
Analyze
sales
records.
Develop a
preliminary
forecast.
Have
managers
review
and
adjust
forecast.
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Build a
sales plan
around
the
forecast.
Make
adjustments
to
operating
plans.
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Characteristics of Successful S&OP Programs
All managerial levels
must support the
S&OP process and the
plans that result.
Firms don’t know how
well they’re doing
unless they measure
outcomes.
Regular meetings are
held.
Metrics monitor
progress and provide
benchmarks.
1.
People
5.
Performance
2.
Process
Successful
S&OP
programs
4.
Strategy
Effective strategy
should align supply
and inventories with
demand.
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3.
Technology
Market intelligence
and decision support
system are in place
for reports that assist
in planning.
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Estimating Industrial Demand
Survey potential industrial
customers to measure their
purchase intentions—the
likelihood they will actually
purchase a given product.
1.
Standardized
classification
systems
Estimating
industrial
demand
approaches
2.
Buyer
intentions
North American Industrial
Classification System (NAICS)
has replaced the original SIC.
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Steps in Forecasting Sales
Using the Breakdown Approach
1. Forecast general economic conditions.
2. Estimate the industry’s total market
potential for a product category.
3. Determine the share of this market the
company currently holds and is likely
to retain in view of competitive efforts.
4. Forecast sales potential of the product.
5. Use the sales forecast for operational
planning and budgeting.
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Sales Forecasting
Model: Breakdown Approach
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Forecasting Approaches
and Techniques
based on primary research
1.
Breakdown
approach
Forecasting
approaches and
techniques
2.
Build-up
approach
Forecast economic conditions, such as
these:
GNP
consumer price index
wholesale price index
interest rates
unemployment levels
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Sales Forecasting Techniques
1.
Nonquantitative
methods
Sales
forecasting
techniques
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2.
Quantitative
methods
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Nonquantitative Forecasting Methods
• Naïve forecast assumes that the next period’s sales will be the same as they were in the previous period.
• Jury of executive opinion method asks key managers within the company for their best estimate of
sales in a given planning horizon and combines the results to develop the forecast.
• Sales force composite method is similar, but it asks the sales force for their best estimates of sales in
the planning horizon.
1.
Judgment
methods
Nonquantitative
forecasting
methods
2.
Counting
methods
• survey of customers’ buying
intentions
• test marketing
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Quantitative Forecasting Methods
• moving averages
• exponential smoothing
• Box-Jenkins
• trend analysis using ARIMA
1.
Time-series
methods
Quantitative
forecasting
methods
2.
Causal or
association
methods
• correlation-regression
• econometric model
• Input-output models
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Statistical Software for
Sales Forecasting
• To learn about SAS, the leader in business intelligence
and predictive analytics software, go to
– http://www.sas.com
• To read about the firms in various industries that use
SAS software to make better, faster, intelligent business
decisions, go to
– http://www.sas.com/software/index.html
• To read white papers and success stories on sales
forecasting and data management by solution, industry,
and technology, go to
– http://www.sas.com/apps/forms/index.jsp?id=wp&cid=3880
– http://www.sas.com/success/index.html
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Articles on Sales Forecasting
• To sharpen your skills by reading interesting articles on
sales forecasting purposes, techniques, and procedures,
go to
– http://www.inc.com/magazine/19971101/1353.html
– http://www.zeromillion.com/business/sales-marketing/salesforecasts.html
– http://www.salesvantage.com/article/view.php?w=628&The_Key
_to_Accurate_Sales_Forecasting/
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Articles on Sales Forecasting
• For interesting articles on choosing the right sales
forecasting method as well as becoming a forecasting
savant, go to
– http://www.salesvantage.com/article/list.php?c=15
– http://www.salesvantage.com/article/view.php?w=724&Sharpen
_Your_Competitive_Advantage_Using_Techniques_that_Makes
_you_a_Forecasting_Savant/
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Time-Series Methods
• Using historical data to predict sales, forecasters look
for the following:
1.Trends are movements in a time series as a result of
developments in population, technology, or capital formation.
2.Periodic movements are consistent patterns of sales
changes in a given period generally called seasonal
variations.
3.Cyclical movements are wave-like movements of sales
that are longer in duration than a year, such as business
recessions.
4.Erratic movements are one-time specific events—such
as wars, strikes, snowstorms, hurricanes, fires, and floods—
that are not predictable.
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Types of Time-Series Methods
1.
Moving
averages
Moving averages are
forecasts developed using
a moving average to
predict future sales as a
mathematical function of
sales in recent time
periods. As the
forecasters add each new
period’s sales data to the
average, they remove
from the total the data
from the oldest period.
Time-series
methods
3.
ARIMA
An autoregressive integrated
moving average (ARIMA)
model is based on the moving
average concept. The model
incorporates information about
trends by spotting patterns in
the fluctuations in data.
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2.
Exponential
smoothing
Exponential smoothing is
a type of moving average
that represents the
weighted sum of all past
numbers in a time series,
with the heaviest weight
placed on the most
recent data.
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Types of Causal or
Association Methods
1.
Correlationregression
analysis
Causal/association
methods attempt to
identify the factors
affecting sales and to
determine the nature
of the relationship
between them.
Causal or
association
methods
3.
Input-output
models
2.
Econometric
models
Econometric models
are based on a series
of regression
equations.
Input-output models are
complex systems showing
the amount of input
required from each
industry for a specified
output of another industry.
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Correlation-Regression Analysis
1.
Correlation
analysis
A correlation analysis
helps calculate the
strength of the
association between
two variables.
Correlations do not
imply cause and effect.
Correlationregression
analysis
3.
Multiple
regression
analysis
Multiple regression analysis
is a statistical approach to
predicting a dependent
variable, such as sales, using
several independent
variables, such as
advertising expenditures and
price simultaneously.
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2.
Simple
regression
analysis
Simple regression
analysis is a
statistical approach to
predicting a
dependent variable
such as sales, using
one independent
variable such as
advertising
expenditures.
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Criteria for Evaluating
Forecasting Methods
1. Comprehensibility: Sales managers
must understand the basic methods of
developing forecasts.
2. Accuracy: A forecasting method must
provide results that are sufficiently accurate
for the purpose desired.
3. Timeliness: The forecasting method must
generate forecasts in time for managers to
use them.
4. Quality and quantity of information:
In forecasting as in other areas, “garbage”
input leads to “garbage” output (GIGO).
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Criteria for Evaluating
Forecasting Methods
5. Qualified personnel: Experts
can give opinions on qualitative
techniques like the jury of
executives’ opinions or the Delphi
method.
6. Flexibility: Managers continually
monitor actual sales for any
deviations from forecast that may
indicate the need for revised
sales forecasting tools.
7. Costs/benefits: The benefits
from forecasting must more
than offset the costs of
generating the sales forecast.
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Sales Budget Planning
A sales budget is a financial sales plan outlining how to allocate resources and
selling efforts to achieve the sales forecast.
1.
Planning
function
Budgeting is an
operational planning
process expressed in
financial terms, which
provides a guide for
action toward achieving
the organization’s
objectives.
Sales
budget
uses
3.
Controlling
function
2.
Coordinating
function
The control function of a
sales budget is to
evaluate actual results
against sales budget
expectations.
Sales budgets must be closely
integrated with budgets for
other marketing functions.
Differences between them are known as budget variances.
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Benefits of Preparing the
Annual Sales Budget
The following are benefits of preparing the annual
sales budget:
• ensure a systematic approach to allocation
resources
• develop the sales manager’s knowledge of
profitable resource use
• create awareness of the necessity of coordinating
selling efforts with other divisions of the company
• establish standards for measuring the performance
of the sales organization
• obtain input from all areas of the company in the
profit-planning process
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Budget Preparation Steps
Sales managers must
provide early warning
of budget overruns and
ensure that sales
revenue and cost ratios
remain within
reasonable budget
limits.
Common line items in sales
budgets include these:
salaries
direct selling expenses
commissions and bonuses
promotional materials
advertising
All management levels
must be fully informed
about sales goals and
objectives.
1.
Review and analyze
the situation
6.
Implement the budget
and provide periodic
feedback
2.
Communicate sales
goals and
objectives
Budget
preparation
steps
5.
Prepare a budget
presentation
4.
Develop a preliminary
allocation of
resources
Succinct, wellreasoned written and
oral budget
presentations can be
used to ask for
increased allocation of
funds.
Assign resources to
particular activities,
customers, products,
and territories.
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3.
Identify specific market
opportunities and
problems
Sales managers and
salespeople should use
budget resources to
pursue specific market
opportunities and deal
with problems on a
timely basis.
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Statistical Software for Sales Budgeting
• To read an interesting article about sales
budgeting software, go to
– http://www.ferret.com.au/articles/z1/view.asp?id=10128
5
• To learn about a sales budgeting software go to
– http://www.managingautomation.com/maonline/director
y/product/Data_Perceptions_Prophecy_Sales_Forecast
ing_and_Budgeting_Software_3604491
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Articles on Sales Budgeting
• To augment your understanding of the link
between sales forecasting and budgeting, go
to
– http://www.allbusiness.com/accountingreporting/budget-budget-forecasting/977-1.html
• To broaden your understanding of sales
budgets in international operations, go to
– http://findarticles.com/p/articles/mi_m0OOL/is_2_5/
ai_n6118710/pg_5
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Ethical Situation: What Would You Do?
Discussion Question
As one of the newer district sales managers for a fast-growing technology
company, you’ve asked your salespeople to give you three sales forecasts in
their territories for the coming year: (a) optimistic, (b) pessimistic, and (c) most
likely. After totaling their three different sales forecasts, you realize that the
optimistic forecast will increase sales by nearly 20% in your district, the
pessimistic forecast by 10%, and the most likely by about 15%. Your national
sales manager has asked each district sales manager to give her their most
likely sales forecast for the coming year, so she can assign sales quotas. Your
thoughts are that it’s probably best to give her the most pessimistic sales
forecast because this should help ensure that she assigns your district a quota
that you should easily achieve. If you can exceed your assigned district sales
quota by a substantial amount, you’ll probably get a large bonus, and you may
even be named district sales manager of the year for your company. You know
that your company’s production schedules are based on the annual sales
forecasts, but you plan to be very aggressive early in the year in ordering
products to make sure you get more than your share for your salespeople
before possible inventory shortages come later. You don’t see any personal
down side to this strategy.
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