Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Financial forecasting is a process of projecting future financial requirements of a firm. 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.
There are several methods of sales forecasts. Some of them are as follows:
A firm can employ its salespersons to provide a close forecast of sales. These salespeople are employed at many places where firm’s products are offered. They collect market information personally from customers, collect customer’s response to the firm’s product and thus provide an estimate if likely sales that the firm can achieve in the future.
- Customer Survey
It is a formal process of sales forecasts applied by the firm on the basis of the survey of customers in many places. The firm employs some survey people to visit many customers from many places and takes the response of existing as well as prospective customers on the basis of direct interview and questionnaire. Existing and prospective customers are asked to give their opinion verbally or in written format about the product offered by the firm. On the basis of an opinion survey of customers, these survey people provide an estimate of future sales.
- Time Series Model
Time series model is a mathematical model of sales forecasts. This model assumes that the level of sales varies according to change in the time period. A time series model states that the relationship between two variables, one of them being the time period and another being sales. A series of the time period is regarded as an independent variable and the level of sales over several time periods is used as dependent variable. Under this method, past sales data are arranged chronologically and statistical analysis of these chronological sales data is made to forecast the level of sales in some future date. Here the sales level is regarded as a function of a time period. The time series model is stated as below:
Yt = f(t)
Where ‘Yt’ represents the value of sales in time ‘t’.
- Econometric Model
An econometric model is an important model used in sales forecasting. This method assumes that sales of the firm are influenced by many factors such as level of inventory, advertisement expenses, cost of production, cost of quality control, research and development expenditure and so on. Sales are regarded as a dependent variable and all other factors under considerations are regarded as independent variables. Once these variables are identified, they are into the following model to provide a forecast of sales.
Y = a+b1X1+b2X2+b3X3+………..+bnXn+e
- Y = Estimated sales
- X1,X2,X3 = value of independent variables influencing sales
- b1,b2,b3 = the coefficient of respective independent variables
- a = the intercept constants
- e = standard random error term.