A successful organization needs to be future oriented. Establishing and managing a sales process for a product requires a forward looking goal. Sales forecasting provides that goal. Sales forecasting can be defined as estimating the sales and revenues of a particular product or a range of products for a given period of time. Sales forecasting is crucial not only for providing goals for the sales teams but also for planning and allocating resources. Forecasts are also used for evaluating the performance of sales units or channels.
Various methods of sales forecasting can be used to determine sales targets. The forecasting method used by an organization depends upon the organization’s specific requirements and the nature of the business. These methods can be divided into two primary types:
- Qualitative Methods: Qualitative methods are subjective in nature. Forecasts are established using consumer expectations, sales force expectations, executive opinions, and the Delphi method.
- Consumer Expectation: This method of forecasting depends on the response of customers with regards to the expected consumption in the forecasting period. It gives a forecast that is closer to market potential than it is to the expected revenue.
- Sales Force Expectations: This method of sales forecast uses estimates of the sales force to arrive at the forecast number. Since sales people are closest to customers, they have a good understanding of the market and can often estimate future sales more accurately. These estimates are then adjusted by management, based on the past accuracy of the estimates and other factors, in order to arrive at a final forecast figure.
- Executive Opinions: This method of sales forecast uses estimates given by the key executives within the company to arrive at the forecast number. These key executives represent various departments in the company, such as sales, finance, operations, marketing, etc. The estimates provided by executives can vary greatly and are often either averaged out to arrive at a forecast, or are determined when general consensus is reached following a group discussion.
- Delphi Method: In this method, executives are interviewed separately and are asked to give their estimates about the forecast. It is an iterative method in which all the estimates are combined and a summary report is created post iteration. This report is then shared with all the executives who are required to give a revised estimate based on the feedback or arguments from other executives.
- Quantitative methods: Quantitative methods use empirical analysis to make forecasts. Two popular quantitative forecasting methods are time-series analysis and explanatory methods.
- Time Series Analysis: Time-series analysis is the simplest method for quantitative forecasting. It takes into account historical data and trends to make predictions for the future. Past sales figures, when adjusted for market factors and growth rate, give a good estimate of future sales. Some popular methods used in time-series analysis are moving averages, exponential smoothing, and decomposition of time series.
- Explanatory Methods: Explanatory methods are different from time-series analysis. They do not use historical sales data to predict future sales, but rather take into account different factors that can affect sales. Tools such as regression and econometric modeling are used to establish causality between other factors affecting sales.
After finalizing the sales forecast, the forecasted revenues are assigned to the sales units as sales targets. The forecasted revenues are further divided and sub-divided into different product units, geographical units, and eventually territories, resulting in targets for individual sales representatives. Since sales targets are directly linked to all sales and marketing and financial objectives, having a good sales forecasting process in place is essential for achieving the company’s overall objectives.
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