The sales forecast is a prediction of a business's unit and dollars sales for some future period of time, up to several

years or more. These forecasts are generally based primarily on recent sales trends, competitive developments, and economic trends in the industry, region, and/or nation in which the organization conducts business. Sales forecasting is management's primary tool for predicting the volume of attainable sales. Therefore, the whole budget process hinges on an accurate, timely sales forecast. These technical projections of likely customer demand for specific products, goods, or services for a specific company within a specific time horizon are made in conjunction with basic marketing principles. For example, sales forecasts are often viewed within the context of total market potential, which can be understood as a projection of total potential sales for all companies. Market potential relates to the total capacity of the market to absorb the entire output of a specific industry. On the other hand, sales potential is the ability of the market to absorb or purchase the output from a single firm. APPROACHES TO FORECASTING. BOTTOM-UP FORECASTING. Analysts using this methodology divide the market into segments, and then separately calculate the demand in each segment. Typically, analysts use sales force composites, industry surveys, and intention-to-buy surveys to collect data. They aggregate the segments to arrive at a total sales forecast. Bottom-up forecasting may not be simple because of complications with the accuracy of the data submitted. The usefulness of the data is contingent upon honest and complete answers from customers, and on the importance and priority given to a survey by the sales staff. TOP-DOWN FORECASTING. This is the method most widely used for industrial applications. Management first estimates the sales potential, then develops sales quotas, and finally constructs a sales forecast. Problems arise with this method, however, when the underlying assumptions of the past are no longer applicable. The correlation between economic variables and quantity demanded may change or weaken over time. These two forecasting methods encompass a number of methodologies which can be divided into three general categories: qualitative, times-series analysis and regression, and causal. QUALITATIVE METHODS. Qualitative methods rely on non-statistical methods of deriving a sales forecast. A company solicits the opinion or judgment of sales executives, a panel of experts, the sales force, the sales division supervisors, and/or outside expert consultants. Qualitative methods are judgmental composites of expected sales. These methods are often preferred in the following instances: 1) when the variables which influence consumer buying habits have changed; 2) when current data is not available; 3) when none of the qualitative methods work well in a specific situation; 4) when the planning horizon is too far for the standard quantitative methods; and 5) when the data has not yet factored in technological breakthroughs taking place or forthcoming. The Probability Assessment Method (PAM) forecasts sales volume by utilizing in-house expert opinion that provides probabilities between one and 99 percent, plus and minus, on certain target volumes. Analysts translate these estimates into a cumulative probability curve by plotting the volumes by the probability assigned to them. They use this curve to aid in forecasting. TIME-SERIES ANALYSIS AND PROJECTION. Trend projection techniques may be most appropriate in situations where the forecaster is able to infer, from the past behavior of a variable, something about its future impact on sales. Forecasters look for trends that form identifiable patterns which recur with predictive frequency. Seasonal variations and cyclical patterns form more obvious trends, while random variables make projection more complex.

While time-series methods do not explicitly account for causal relationships between a variable and other factors, analysts find the emergent historical patterns useful in making forecasts. Analysts typically use time series for new product forecasts, particularly in the intermediate and long-term. The data required varies with each technique. A good rule of thumb is a minimum of five years' annual data. A complete history is very helpful. CAUSAL METHODS. When analysts find a cause-effect relationship between a variable and sales, a causal model may provide better forecasts than those generated by other techniques. Life-cycle analysis forecasts new product growth rates based on analysts' projections of the phases of product acceptance by various groupsinnovators, early adapters, early majority, late majority, and laggards. Typically, this method is used to forecast new product sales.. It is often necessary to do market surveys to establish the cause-effect relationships. THE PRODUCTION BUDGET. Both small and large businesses construct their production budgets within limitations of production, warehousing, delivery, and service capabilities. Subsequently, a company attempts to schedule production at maximum efficiency. By anticipating the variations in monthly sales, management can keep production at levels sufficient to provide adequate supply. Labor costs generally comprise the greatest single production cost. Therefore, management may adjust labor hours to production schedules. Production levels remain rather constant if current inventory is sufficient to meet increases in sales. If management expects an increase, it may build inventories during the first quarter of the budget, and sell them down to planned levels during the remaining three quarters. From the production budget, a company estimates the mix of materials, labor, and production overhead needed to meet planned production levels