Meaning of Sales Forecasting
Sales Forecasting is a process of estimating future sales. It indicates how much of a product is likely to be sold in the future. It is based on historical data, industry trends, and current sales status. It is a mere prediction about your sales to develop a sales plan. Companies can roughly estimate the sales which will help them to plan their business sales model. It shows the workable volume of sales. It helps with business planning and budgeting.
Three Types of Sales Forecasting
Short-Term Forecasting
Short Term Forecasting means estimating sales for a shorter period. The period for short-term forecasting is varying, from a month to a year. Its frequency can be weekly, monthly, quarterly, half-yearly, and yearly. We can create a production policy, plan material requirements, purchase procedure, and inventory control.
Medium-Term Forecasting
The forecasting for around 2 to 4 years is known as medium-term forecasting. It helps us to manage budgets, expenditure, and production.
Long-Term Forecasting
When we forecast sales for a longer period, it will be considered as long-term forecasting. The period varies from more than 5,10,20 years. It helps to plan financial requirements for your company. You can arrange personnel, raw material, and labour as per the forecasting.
Advantages of Sales Forecasting
- It will help us to make better business decisions. You can forecast sales for your business. It will help you with budgeting, financial planning, and risk management
- It will help you to achieve your sales target. You can identify the sales warning signals and threats. After that, you can make your plans accordingly to increase your sales
- Sales forecasting allows us to allocate resources for the growth of our companies
- You can identify sales opportunities with the help of sales forecasting. This will help you to grab early opportunities
- You can adjust your sales personnel based on sales forecasting. If there are chances of an increase in sales, then you can employ more personnel in your company and vice versa
- It helps departments to work in coordination and together
- Sales forecasting helps you to determine your production capacity. If there are chances of sales increase, then you can increase your capacity and vice versa. You can also arrange raw materials as per the forecasting and production needs
- Sales forecasting gives us a good understanding of the companies’ cash flow
- It also helps us to develop an advertising strategy for our product
- It helps us in other important business activities also. Activities like marketing, production, and finance
- With the help of sales forecasting, you can generate an idea about future revenues. This will allow you to take advantage of changes in the economy
Disadvantages of Sales Forecasting
- Sales forecasting is a prediction about your future sales. The future is uncertain. There are possibilities of incorrect sales forecasting which can lead to improper planning. This can reduce your future profit
- There can be changes in fashion and trends. If the consumers start adopting new fashions and styles, this will make your product out of fashion. No one wants to buy an out-of-fashion product, which will affect your sales negatively
- If you don’t have any historical data and statistics about your sales, if your company lacks sales history or past details, then you cannot make proper sales forecasting without a base
- If the taste and preferences of the consumer change it will also affect your sales forecasting and hence sales revenue
- If new technologies are introduced in the market, your technology will become obsolete. It will also affect your sales forecasting and hence sales planning.
Methods of Sales Forecasting
Time Series
Time series is a process of observing data over time. In this, you gather historical values and associated data for forecasting sales. It includes analyzing cyclical changes, seasonal variations, and irregular fluctuations.
Trend Analysis
Sales trends analysis means finding patterns in data. It means if the trend is going upward it will be beneficial for you and vice versa. It provides us a measurable track to our progress.,
Moving Average
This method is a combination of last period’s sales and past average. It means you neither use very old data nor previous numbers. It provides sales forecasting about the sales which are neither related to seasonal variation nor market secular trends.
Linear and Multiple Regression Analysis
Regression analysis is a mathematical method of sales forecasting. It needs knowledge of statistics and regression values.
The Jury of Executive Opinion
This method includes a jury of executives and experts. This jury tells about the future market with the help of their knowledge and experience. They consider various internal and external factors.
Salesforce Composite Method
In this method, companies directly approach their sales team. As these people work in direct contact with customers. They will know more about them. They can give us information about their needs and hence about sales forecasting.
Wrapping Up
This is all about sales forecasting. Every company needs to forecast its sales to prepare sound planning for the future. You can’t wait for future problems and then find solutions to tackle them. You need to prepare a pre-defined plan for which you need sales forecasting. You can arrange your raw material, personnel, and production capacity as per the sales forecasting. There are various methods of sales forecasting available. Sometimes only a single method is not suitable. So, you can choose combinations of methods for sales forecasting. You need to review and revise your sales forecasting periodically. You should try to determine a method that is short, inexpensive, and accurate. The criteria of a good forecasting method include:
- Accuracy
- Cost of employing method
- Complexity
- Length of forecasting
