Sales Management

Planning , Budgeting and Forecasting

What is Planning ?
Planning stems from the sales forecast and the purpose of planning is to allocate company resources in such a manner as to achieve the anticipated sales. A company can forecast sales either by forecasting market sales (called market forecasting) and then determining what share of this will accrue to the company or by forecasting the companys sales directly.

Types of Forecasts
Short-term forecasts: Usually for periods up to three months
ahead and are really of use for tactical matters such as production planning. The general trend of sales is less important here than short-term fluctuations.

Medium-term forecasts. These have direct implications for

planners. They are of most importance in the area of business budgeting, the starting point for which is the sales forecast. Thus, if the sales forecast is incorrect, then the entire budget is incorrect. Medium-term forecasts are normally for one year ahead.

Long-term forecasts. These are usually for periods of three

years and upwards depending on the type of industry being considered. In industries such as computers three years is considered long-term, whereas for steel manufacture ten years is a typical long-term horizon.

 Production needs to know about sales forecasts so that they can arrange production planning. Purchasing usually receives its cue to purchase from production via purchase requisitions or bills of material. Human resource management is interested in the sales forecast from the staffing planning viewpoint. Financial and, more specifically, costing functions need the medium-term forecast to budget. The long-term forecast is of value to financial accountants in that they can provide for long-range profit plans and income flows. R&D will use Market research reports so that they will be able to design and develop products suited to the marketplace Marketing needs the sales forecast so that sales strategies and promotional plans can be formulated in order to achieve the forecasted sales.

Why should you Forecast ?

Techniques for Forecasting

Forecasting

Quantitative/ Objective method

Qualitative/ Subjective method

Quantitative /Objective
1) Ratio 2) Time Series 3) Moving average 4) Exponential smoothing 5) Input Output 6) Econometric model 7)Causal Analysis

Causal Analysis

Qualitative/ Subjective

1)Field Sales Force

a)Leading Indicators

2)Jury Executive

b)Regression Analysis

3) Customers Opinion

3)Delphi Method

Sales forecasting The Process

Following steps in sales forecast : 1) Determine the objectives 2)Fix time period 3)Data collection (source, method of collection& tools of data collection ) 4)Select the method(s)/ techniques of analysis 5) Analysis & forecast

Qualitative techniques
1)Field sales Force Opinion : Called Grass root approach .
The individual salesman project/ forecast his sales for the territories. These are combined & modified , if need be, by the district/regional level managers before forwarding to corporate headquarters to make a comprehensive forecast. Advantages: 1) For short term forecasts 2) Involvement of sales force

Limitations : 1) Salesmen may overlook vital environment factors 2) Tendency to forecast lower figures to be sure

2) Jury of Executive Opinion (Top down method) :

In this case instead of salesmen , senior executives who are well informed & knowledgeable make forecasts . Since their individual assessment varies , an average figure is calculated & projected as the forecast . Advantages: 1) Quick & easy 2) Experience & knowledge are used fully 3) Inescapable where organization is new or sales statistics are not available . Limitations : Since executives are exposed to similar types of business conditions , their opinions are biased in one direction.

 3) Customers Opinion :
Customers opinion reflect their expectations or intention to buy a product. Even though the principle is good , it is not practical , especially , when number of consumers are more . Secondly consumer opinion centers around their intention to buy an item but not actual buying . In the case of industrial products , where customers are less, this method is good.

 4) Delphi technique : Rand corporation developed this

technique .Here , opinion of Experts are obtained . These experts are not allowed to meet & discuss before hand. Having made their estimates , these experts are given opportunities to correct their assessments based on their own previous estimates & also the estimate of other experts without disclosing their identity .This iteration process takes time . Number of experts may vary from 5 to 30 . Adv: 1) Retain individual wisdom 2) Prevent group pressure Limitations :1) Differing perception of experts 2)Subjective error of experts Similar to Jury of executive the method in which employees of same organization ,meet & discuss their differing perceptions .Hence independent nature of opinion suffers & final forecast is susceptible to group pressures .

 1) Ratio Method: This is a quantitative method where the

growth percentage of current year is assumed in the same ratio of past growth .Hence next years forecast of sales S t+1 is given by the equation. S t+1 = S t X St/ St-1 Where St+1 = Sales forecast for the next year St= Sales of current year St-1 = Sales of last year Eg Let sales in 1999= Rs 1 lakh Sales in 2000 = Rs 1.2 lakh Sales for year 2001 = 1.2 x 1.2/1 =Rs 1.44 lakh.

Quantitative Method

 2)Statistical Method :
The various statistical method of forecast are 1) Time series analysis (useful when seasonality occurs in data pattern ) 2) Moving average method (method averages out & smoothes data in a time series ) 3) Exponential smoothing 4) Regression analysis The above methods make use of statistical & probability theories .

 3) Leading Indicators :
This is a Causal analysis. There are instance where changes in demand precede certain changes in one or two leading factors. For eg, , sales of TV is directly influenced by setting up T.V station in the territory where demand is forecasted. This is also the case of using washing machines / other electrical gadgets & electrification of territory . These indicators can be used for regression analysis.

 4) Input- Output Analysis : It is assumed that use of inputs are proportional to

outputs. This analysis is useful for products sold to government agencies , industrial users & institutions having a fairly large set of demand & usage pattern . In mining industries and cement factories the output depends on the availability of certain critical minerals from the mines . Depending on the availability of such inputs, outputs/sales can be forecasted.

The major limitation is the requirement of large amount of data on inputs which are not easily available with small firms.

 5)Econometric Model : This model uses economic

theory & statistical method of establishing cause-effect relationship to forecast the sales figures . A number of independent variables are identified which influence the sales as a dependant variable. Independent variable are both endogenous & exogenous factors. Some of them are beyond the scope of management like G.N.P . Econometric models are used mostly in macro environment analysis. T his method is more accurate than regression analysis in predicting changes, since the number of variables used are more in statistical techniques. Econometric model is used in the following : 1) Forecasting durable goods 2)Forecasting industry sales instead of company sales .