Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Sales forecasting is the process of estimating future sales. Accurate sales forecasts enable companies to make informed business decisions and predict short-term and long-term performance. It forms a basis of sales budget, production budget natural budget etc.
The purpose of sales forecasting should be to provide information that you can use to make intelligent business decisions.
Factors to be Considered while developing Sales Forecasting
Factors to Consider
- Past Economic Performance.
- Current Global Conditions.
- Current Industry Conditions.
- The rate of Inflation.
- Internal Organizational Changes.
- Marketing Efforts.
- Seasonal Demands.
Some factors that should be considered while developing a sales forecast are as follows:
1. Provide a projection of divisional sales based on historical growth and combine the divisional sales forecasts to provide an approximate corporate sales forecast.
2. Forecast the level of economic activity in each market area of the firm along with the change in population and their economic growth.
3. Estimate the market share of the firm that is expected in each market area depending on the firm’s production and distribution capacity, a capacity of competitors, the possibility of a new product and so on.
4. Forecast the effect of future rate of inflation in the consumer’s purchasing power and price of products.
5. Consider the effect of advertisement campaigns, price discounts, credit terms and so on.
6. Provide the ultimate forecasts of sales for each division in aggregate and on an individual product basis.
The accurate sales forecast must be as accurate as possible. If it is overly optimistic, the firm may have idle plant capacity and unnecessary investment in inventories. If the sales forecast is overly pessimistic, it may result in losing the customers because of failure to meet demand. Both of these conditions result into the low-profit-margin, low return on assets, low return on equity and decline in market price of a share. Therefore, the accurate sales forecast is significant to improve the profitability of the firm.