1. Sales Forecasting

2. SALES FORECASTING Sales Forecast Why forecast? What is it used for?
The amount of a product a company expects to sell during a specific period at a specified level of marketing activities
Units and Revenue
Why forecast? What is it used for?
Drives all other budgets
All other budgets must wait for sales forecast

3. SALES FORECASTING Who is affected by it?
Ops – raw materials, support for existing products, warehousing, production equipment
Finance – inventory, all finance statements and expectations, Wall Street Guidance
Marketing – mix variables drive forecast and are effected by it, etc.
Sales force – budgets, territory sized and # of reps, sales support, customer service
HR – hiring in Ops, Mktg, Sales, all parts of the company,
R&D – existing product support, new product investments ($ and direction of investment)
All budgets across the company flow from sales budget

4. Impact of Erroneous Sales Forecasts
Functional area
Forecast
Too high
Too low
Production
excess output, unsold products
inadequate output to meet customer demand
Inventory
overstock
understocks
Finance
idle cash
cash shortage
Promotion
wasted expenditures
insufficient expenditures to cover the market
Distribution
costly, insufficient to sell excess products
inadequate to reach market
Pricing
reductions to sell excess products
price increases to allocate scarce products
Sales force
too many salespeople, high selling costs
too few salespeople, market not covered
Customer relations
money wasted on unneeded activities, resulting in lower profits
unsatisfactory due to out-of-stock products
Profits
lower unit profits since expenses are high
lower total profits because market not covered

5. Qualitative Sales Forecasting Techniques
Executive/Owner Judgment
Surveys
Customer forecasting survey
Sales force forecasting survey
Expert forecasting survey
Delphi technique (panel of experts)

6. Quantitative Sales Forecasting Methods
Averaging
Simple averages
Moving (rolling) averages
Exponential smoothing
Time-Series Analysis
Trend Analysis
Cycle analysis
Seasonal analysis

7. Quantitative Sales Forecasting Techniques
Regression Analysis: Predicting sales based on the relationship between past sales and one or more variables
Simple Regression: relationship between 1 independent variable and 1 dependent variable (sales)
Multiple Regression: shows strength of relationships between multiple independent variables and dependent variable (sales)
Caution 1: no one has yet been able to create a formula that guarantees accurate output
Caution 2: correlation does NOT equal causation
Caution 1: no one has yet been able to create a formula that says guarantees accurate output
for inputs A, B, C, and D, (e.g. spending on advertising, consumer promotion, trade promotion and a certain price) and you get output of X sales

8. Other Sales Forecasting Techniques
Market Tests
Making a product available in the marketplace and measuring purchases and consumer responses
Test full mix on limited scale
Search for test markets that look like your national target, but on smaller scale

9. Assumptive Reasoning (Chain Ratio)
Break a problem down into “knowable” parts, then rebuild it using reasonable assumptions for those parts

10. Market Share-Based Forecast
Determine the market size
Actual best; potential if actual is unknown
Determine the market share you will obtain
Excellent justification of share figure(s)
“We think…” is insufficient
Translate share into units and dollars
Market share is after-the-fact calculation; measures success of marketing plan and execution

11. Forecasting Output
Credible case for expected unit sales and revenue figures
Credible, not perfect
Units first, then revenue
Revenue is result of unit sales, not vice-versa
Built on well-supported assumptions
Every “we think” weakens forecast
Market share is “after-the-fact” calculation
Typically a poor starting point for a forecast

12. Forecasting Considerations
Multiple approaches often yield best results
Use quantitative & qualitative info from all levels
Internal information – especially past history
National, regional, local information of relevance
Competitive/industry information
Go as micro as possible – but not to paralysis
Localize trends
Forecast units and revenue
For ALL revenue streams
Include returns, lost customers, failed renewals, etc.

13. Forecasting Considerations
Use logic checks/balances
Use several forecast methods and compare
Logic checks
Market share in units, dollars, customers
Average sales/day
Your own capacity (Ops, HR, etc.)
Build flexibility into the plan
Watch cash flows by month

14. Forecasting the “New” Identify and justify a “proxy”
How are you the same? How do you differ?
Understand environment’s impact on your business
Some trends can serve as a directional basis upon which you build
Be conservative – better for cash management
Credible and believable assumptions
Often required, especially with “new”
Critical: if they stand scrutiny, forecast is credible
Spell out every assumption

15. Forecast All Revenue Streams
Notes
Jan
Feb
Mar
Apr
May
Jun
Jul
New customers 8 12 16 25 40 35
Initiation fees
$1,500
Monthly fees
$100
per month
Income Statement $0
$12,000
$18,000
$24,000
$37,500
$60,000
$52,500
$800
$1,200
$1,600
Failed renewals
-$100
-$200
Total revenue
$38,300
$61,100
$53,900

16. Forecast All Channels Notes Jan Feb Mar Apr May Jun Jul
Direct customers 8 38 30 48 60 50
Retail units
ASP - Direct
$400
ASP - Retail
$250
Income Statement
Direct sales $0
$3,200
$15,200
$12,000
$19,200
$24,000
$20,000
Retail sales
$7,500
$12,500
Total revenue
$19,500
$26,700
$36,500
$27,500

17. Errors to Avoid Do not just assume revenue in first month
Do not deliver straight line forecasts
AVOID (or justify) “hockey stick” or “inverted hockey stick” forecasts
Try not to apply national trends to local businesses
Don’t expect perfection

18. Market Size (Market Potential)
number of buyers in the target market x quantity (units) purchased by an average buyer in the market per year price of an average unit
Example
2,000,000 buyers
6 purchases/year
$1.50/purchase
Based on usage rates
Price you get for a unit. Can differ from price customer paid

19. Breakeven

20. Costs
Breakeven Point
The point at which the costs of producing a product equal the revenue made from selling the product
The point after which profitability begins
Identify in what month you will break even
Costs
Fixed to
Contribution
Unit -
Per
Breakeven Point =
Costs
Unit Variable –
Price
Unit
Fixed
Total
Breakeven Point =