Sales forecasting

The sales forecast is the factor around most business planning centers. Such important areas of decision making as production and inventory scheduling, planning of plant and equipment investments, manpower requirements, raw material purchases, advertising outlays, ales force expenditures, and cash flow needs are dependent on the sales forecast. It follows that any significant error in the forecast will have far reaching and serious consequences.

Subjective Methods:

Jury of Executive Opinion: Some firms begin with executive forecasts in what is known as a jury of executive opinion. Each of a number of executives makes an independent forecast of sales for the next period, usually a year. These forecasts are more than just guesses. These executives have considerable factual data available to them, and presumably they possess mature judgment.

Once the various executives have made their estimates, some method of reconciling the differences must be found. The chief executives of the company may consider the various estimates and make a final decision. A better procedure is to bring the group of executives together to discuss their estimates. Discussion may bring out new ideas and lead some individuals to modify their previous estimates. If the group cannot come to general agreement, the chief executive will have to make the decision.

The jury method has the advantage of simplicity and of representing a number of different viewpoints. Its chief disadvantage is that it is based on opinions. The opinions are all apt to be influenced in a similar direction by general business conditions and conditions in the specific company that is, the executives are apt to become overly optimistic or overly pessimistic together.

Errors in subjective forecasts tend to include two different elements error associated with the expertise of the individuals involved and error associated with contagious factors, the general optimism or pessimism that comes from conditions in the general economy and within the specific firm. Study of subjective forecasts over time can provide systematic improvement in them. The expertise error can be reduced by providing more information to the forecasters on influential factors such as trend data in key accounts. Contagious errors can be reduced by conscious efforts to reduce to reduce the attention given to the general economic situation.

Sales Force Estimates: Another common method of forecasting is by means of sales force estimates. The actual process by which a final sales forecast is derived varies substantially among firms. If the process starts with sales representatives they may be asked to state the probabilities of selling various quantities of each product or product group to each present and prospective customer in their territories. It is probable that they will receive inputs designed to help them make better forecasts from a variety of people including sales supervisors, product managers, company economists, and marketing researchers. This help will include projections of the general economic climate, activities of competitors, and the planned activities of the firm.

In some cases sales representatives may be given a forecast for their territories and asked to adjust it, or they may be given a range within which sales will probably fall and asked to indicate a most likely figure. Branch managers may go over sales representatives’ estimates and discuss changes with them, or they may simply adjust the forecasts according to their own judgments and pass them up – either on an aggregated or disaggregate basis to higher level management where they are reviewed again and an ultimate decision made on the forecast to accept.

For short term forecasts (e.g. quarterly), it is likely that sales representatives can do a better job than can be done using more sophisticated objective methods particularly during times of great change. Sales representatives’ knowledge of the probable demand of major accounts for the product over the next several months is about the only basis on which a firm especially those selling industrial products can adjust its plans to the dynamics of the marketplace.

Use of the sales force to prepare forecasts has the obvious advantage of involving all sales representatives and making them feel responsible for achieving the sales target. But their estimates also have severe limitations in that the sales representatives are hardly disinterested parties that is, it is very much to heir advantage to be assigned conservative sales goals.