Lecture 18 - Sales Forecasting and Budgeting PDF

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Sales Forecasting  Reasons  Users  Techniques  Influencing factors Budgeting  Types  Determining the budget Sales Forecasting The term sales forecast refers to the total sales of a product that a firm expects to sell during a specified time period under specified environmental conditions and its own marketing efforts. Sales forecasts are commonly made for periods of three months (quarterly), six months, or one year (annually). Usually the sales forecasting period coincides with the firm’s fiscal year. The operations cycle of some firms is shorter than a year, and they prefer to forecast for that cycle (e.g. four seasons in the fashion industry). When the forecasting period is short (one year or less) accuracy is likely to be greater. Businesses need to be able to predict customer behaviour with some degree of certainty in order to make important business decisions. E.g. know how much stock to buy, when to launch marketing campaigns or where to build new retail stores Reasons for forecasting  All departments plan their work for the coming period based on the sales forecast (if the forecast is wrong, the plans based on it will be wrong, too)  Good sales forecasts help to schedule production: o The consequence of over-production is unsold stock - holding excess stock costs the business in overheads o Under-production can be detrimental as sales opportunities might be missed because people don't like waiting around for things  The sales forecast plays a critical role in salesforce planning  The sales forecast helps to determine the budget for the departments  It influences sales quotas and compensation of salespeople. Users of forecasting  Production/service delivery o For products - to plan and schedule manufacturing operations - machines, labour and materials o For services - to anticipate when, how and by whom the service will be delivered  Distribution - for the consideration of space, transport and manpower so you don't book too many vehicles/storage when it is not needed.  Personnel - for recruitment (or dismissal) policies, training requirements, and management and staff development.  Purchasing - for the arrangement of materials and components, and to negotiate more favourable deals with suppliers.  Finance - sales forecasts are the basis on which departments within the organisation establish their cost budgets.

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Marketing - may be responsible for preparing forecasts, but they also use them to assist promotional timing and expenditure. Research and development - requires longer-range forecasts to indicate possible product changes or new product requirements.

Sales Forecasting Techniques Three main sales forecasting techniques are often used:  Judgments of the decision maker  Surveys of knowledgeable groups  Statistical methods Judgements of the decision maker A direct forecast involves estimating the value to be forecast without any intervening steps. A lost-horse forecast involves starting with the last known value of the item being forecast, listing the factors that could affect the forecast, assessing whether they have a positive or negative impact, and making the final forecast. The technique gets its name from how you'd find a lost horse: go to where it was last seen, put yourself in its shoes, consider those factors that could affect where you might go (to the pond if you're thirsty, the hayfield if you're hungry, etc.), and go there. Surveys of knowledgeable groups Two common groups that are surveyed to develop sales forecasts are (1) prospective buyers and (2) the firm's salesforce. 1. For industrial (B2B) products with few prospective buyers, this can be effective e.g. Boeing aeroplanes surveys just a few hundred customers worldwide to develop its sales forecasts and production schedules. 2. Your people are in contact with customers and are likely to know what customers like and dislike. However, salespeople can be unreliable forecasters - painting too rosy a picture if they are enthusiastic about a new product or too grim a forecast if their sales quota/bonuses are based on it. Statistical methods The best-known statistical method of forecasting is trend extrapolation - taking a pattern observed in past data and extending it into the future. When the pattern is described with a straight line, it is linear trend extrapolation. Factors influencing forecast  Conditions within the company - Any change in the products, price structure, promotional plans, or channels of distribution may influence future sales  Conditions within the industry - Any change within the industry has an impact on the firm, e.g., if a competitor is planning to redesign its products, it may obtain a larger share of the market during the coming period  Market conditions - If basic demand factors are in a slump, the future sales of the firm will be affected  General business conditions - A major influencing factor in future sales development is the general state of the economy

Budgeting A budget is a financial plan that the manager uses to plan for profits by anticipating revenues and expenditures:

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The budgetary process begins in the sales department with the formulation of a sales forecast From the sales forecast, a detailed sales budget is developed that contains the expected sales of each item in the product line The validity of the entire budgetary process depends on the accuracy of this one sales budget. If it is in error, all others will also be in error!

Determining the Sales Budget: Percentage of Sales Funds are allocated to promotion as a percentage of past or anticipated sales, in terms of either dollars or units sold e.g. “Our promotion budget for this year is 3% of last year's gross sales.” Advantage: It is simple and provides a financial safeguard by tying the promotion budget to sales. Disadvantage: It implies that sales cause promotion. Using this method, a company may reduce its promotion budget because of a downturn in past sales or an anticipated downturn in future sales situations in which it may need promotion the most. Determining the Sales Budget: Competitive Parity Matching the competitor's absolute level of spending or the proportion per point of market share. This approach has also been referred to as matching competitors or share of market → It is important to consider the competition in budgeting. Consumer responses to promotion are affected by competing promotional activities, so if a competitor runs 30 radio ads each week, it may be difficult for a firm to get its message across with only 5 ads. The competitor's budget level, however, should not be the only determinant in setting a company's budget. The competition might have very different promotional objectives, which require a different level of promotion expenditures. Determining the Sales Budget: Objective & Task The company (1) determines its promotion objectives, (2) outlines the tasks it will undertake to accomplish those objectives, and (3) determines the promotion cost of performing those tasks. This method takes into account what the company wants to accomplish and requires that the objectives be specified. Strengths of the other budgeting methods are integrated into this approach because each previous method's strength is tied to the objectives. E.g. if the costs are beyond what the company can afford, objectives are reworked and the tasks revised. The difficulty with this method is the judgment required to determine the tasks needed to accomplish objectives. Determining the Sales Budget: All You Can Afford Common to many small businesses = money is allocated to promotion only after all other budget items are covered, e.g. “how much can they afford to give us this year?” Fiscally conservative, this approach has little else to offer. A company acts as though it doesn't know anything about the promotion-sales relationship or what its promotion objectives are. This method is bad because in time when they are successful, they need marketing the most and when they are most successful, they need marketing the least....