chapter 5 sales forecasting and budgeting powerpoint presentation prepared by dr. rajiv mehta new...

Chapter 5

Sales Forecasting and Budgeting

PowerPoint presentation prepared byDr. Rajiv Mehta

New Jersey Institute of Technology

Copyright © Houghton Mifflin Harcourt Publishing Company. All rights reserved. 5 | 2

Chapter Outline

• Sales Forecasting and Its Relationship to Operational Planning

• Forecasting Approaches and Techniques• Evaluating Forecasting Approaches• Sales Budget Planning• Preparing the Annual Sales Budget


Learning Objectives

After reading this chapter, you should be able to do the following:1. Relate sales forecasting to operational planning.2. Use the most popular quantitative and qualitative sales

forecasting tools.3. Evaluate the various sales forecasting techniques.4. Identify the purpose and benefits of sales budgets.5. Prepare an annual sales budget.


Sales Forecasting and Its Relationship to Operational Planning

• A sales forecast is a prediction of the future market potential for a specific product. It sets the sales expectations for a given time period and can indicate what types of products customers are likely to want.

• Market potential is a quantitative estimate, in either physical or monetary units, of the total sales for a product within a market.

• Sales potential is the portion of market potential that one among a set of competing firms can reasonably expect to obtain.


Reasons Why Forecasting Is Important

• sales and marketing planning

• production scheduling• cash flow projections• financial planning• capital investment• procurement• inventory management• human resource planning

(hiring salespeople)• budgeting


Functional areaForecast

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

Impact of Erroneous Sales Forecasts


Analyze sales

records.

Analyze sales

records.

Develop a preliminary

forecast.

Develop a preliminary

forecast.

Have managers

review and

adjust forecast.

Have managers

review and

adjust forecast.

Build a sales plan

around the

forecast.

Build a sales plan

around the

forecast.

Make adjustments

to operating

plans.

Make adjustments

to operating

plans.

Sales and Operational Planning Process (S&OP)


Characteristics of Successful S&OP Programs

5. Performance

5. Performance

4. Strategy

4. Strategy

3.Technology

3.Technology

2.Process

2.Process

1. People

1. People

Successful S&OP

programs

Successful S&OP

programs

All managerial levels must support the S&OP process and the plans that result.

All managerial levels must support the S&OP process and the plans that result. Regular meetings are

held.

Metrics monitor progress and provide benchmarks.

Regular meetings are held.

Metrics monitor progress and provide benchmarks.

Firms don’t know how well they’re doing unless they measure outcomes.

Firms don’t know how well they’re doing unless they measure outcomes.

Effective strategy should align supply and inventories with demand.

Effective strategy should align supply and inventories with demand.

Market intelligence and decision support system are in place for reports that assist in planning.

Market intelligence and decision support system are in place for reports that assist in planning.


Estimating Industrial Demand

1.Standardized classification

systems

1.Standardized classification

systems

2.Buyer

intentions

2.Buyer

intentions

Estimating industrial demand

approaches

Estimating industrial demand

approaches

North American Industrial Classification System (NAICS) has replaced the original SIC.

North American Industrial Classification System (NAICS) has replaced the original SIC.

Survey potential industrial customers to measure their purchase intentions—the likelihood they will actually purchase a given product.

Survey potential industrial customers to measure their purchase intentions—the likelihood they will actually purchase a given product.


Steps in Forecasting Sales Using the Breakdown Approach

1. Forecast general economic conditions.

2. Estimate the industry’s total market potential for a product category.

3. Determine the share of this market the company currently holds and is likely to retain in view of competitive efforts.

4. Forecast sales potential of the product.

5. Use the sales forecast for operational planning and budgeting.


Sales Forecasting Model: Breakdown Approach


Forecasting Approaches and Techniques

1.Breakdown approach

1.Breakdown approach

2.Build-up approach

2.Build-up approach

Forecasting approaches and

techniques

Forecasting approaches and

techniques

Forecast economic conditions, such as these:GNPconsumer price index wholesale price index interest ratesunemployment levels

Forecast economic conditions, such as these:GNPconsumer price index wholesale price index interest ratesunemployment levels

based on primary researchbased on primary research


Sales Forecasting Techniques

1.Nonquantitative

methods

1.Nonquantitative

methods

2.Quantitative

methods

2.Quantitative

methods

Sales forecasting techniques

Sales forecasting techniques


Nonquantitative Forecasting Methods

1. Judgment methods

1. Judgment methods

2. Counting methods

2. Counting methods

Nonquantitative forecastingmethods

Nonquantitative forecastingmethods

• Naïve forecast assumes that the next period’s sales will be the same as they were in the previous period.

• Jury of executive opinion method asks key managers within the company for their best estimate of sales in a given planning horizon and combines the results to develop the forecast.

• Sales force composite method is similar, but it asks the sales force for their best estimates of sales in the planning horizon.

• Naïve forecast assumes that the next period’s sales will be the same as they were in the previous period.

• Jury of executive opinion method asks key managers within the company for their best estimate of sales in a given planning horizon and combines the results to develop the forecast.

• Sales force composite method is similar, but it asks the sales force for their best estimates of sales in the planning horizon.

• survey of customers’ buying intentions

• test marketing

• survey of customers’ buying intentions

• test marketing


Quantitative Forecasting Methods

1. Time-series

methods

1. Time-series

methods

2. Causal or

association methods

2. Causal or

association methods

Quantitative forecastingmethods

Quantitative forecastingmethods

• moving averages

• exponential smoothing

• Box-Jenkins

• trend analysis using ARIMA

• moving averages

• exponential smoothing

• Box-Jenkins

• trend analysis using ARIMA

• correlation-regression

• econometric model

• Input-output models

• correlation-regression

• econometric model

• Input-output models


Statistical Software for Sales Forecasting

• To learn about SAS, the leader in business intelligence and predictive analytics software, go to– http://www.sas.com

• To read about the firms in various industries that use SAS software to make better, faster, intelligent business decisions, go to– http://www.sas.com/software/index.html

• To read white papers and success stories on sales forecasting and data management by solution, industry, and technology, go to– http://www.sas.com/apps/forms/index.jsp?id=wp&cid=3880– http://www.sas.com/success/index.html


Articles on Sales Forecasting

• To sharpen your skills by reading interesting articles on sales forecasting purposes, techniques, and procedures, go to– http://www.inc.com/magazine/19971101/1353.html – http://www.zeromillion.com/business/sales-marketing/sales-

forecasts.html– http://www.salesvantage.com/article/view.php?

w=628&The_Key_to_Accurate_Sales_Forecasting/


Articles on Sales Forecasting

• For interesting articles on choosing the right sales forecasting method as well as becoming a forecasting savant, go to– http://www.salesvantage.com/article/list.php?c=15 – http://www.salesvantage.com/article/view.php?

w=724&Sharpen_Your_Competitive_Advantage_Using_Techniques_that_Makes_you_a_Forecasting_Savant/


Time-Series Methods

• Using historical data to predict sales, forecasters look for the following:

1.Trends are movements in a time series as a result of developments in population, technology, or capital formation.

2.Periodic movements are consistent patterns of sales changes in a given period generally called seasonal variations.

3.Cyclical movements are wave-like movements of sales that are longer in duration than a year, such as business recessions.

4.Erratic movements are one-time specific events—such as wars, strikes, snowstorms, hurricanes, fires, and floods—that are not predictable.


Types of Time-Series Methods

1. Moving

averages

1. Moving

averages

3. ARIMA

3. ARIMA

2. Exponential smoothing

2. Exponential smoothing

Time-series methods

Time-series methods

Exponential smoothing is a type of moving average that represents the weighted sum of all past numbers in a time series, with the heaviest weight placed on the most recent data.

Exponential smoothing is a type of moving average that represents the weighted sum of all past numbers in a time series, with the heaviest weight placed on the most recent data.

Moving averages are forecasts developed using a moving average to predict future sales as a mathematical function of sales in recent time periods. As the forecasters add each new period’s sales data to the average, they remove from the total the data from the oldest period.

Moving averages are forecasts developed using a moving average to predict future sales as a mathematical function of sales in recent time periods. As the forecasters add each new period’s sales data to the average, they remove from the total the data from the oldest period.

An autoregressive integrated moving average (ARIMA) model is based on the moving average concept. The model incorporates information about trends by spotting patterns in the fluctuations in data.

An autoregressive integrated moving average (ARIMA) model is based on the moving average concept. The model incorporates information about trends by spotting patterns in the fluctuations in data.


Types of Causal or Association Methods

1. Correlation-regression

analysis

1. Correlation-regression

analysis

3. Input-output

models

3. Input-output

models

2. Econometric

models

2. Econometric

models

Causal or association

methods

Causal or association

methods

Econometric models are based on a series of regression equations.

Econometric models are based on a series of regression equations.

Causal/association methods attempt to identify the factors affecting sales and to determine the nature of the relationship between them.

Causal/association methods attempt to identify the factors affecting sales and to determine the nature of the relationship between them. Input-output models are

complex systems showing the amount of input required from each industry for a specified output of another industry.

Input-output models are complex systems showing the amount of input required from each industry for a specified output of another industry.


Correlation-Regression Analysis

1. Correlation

analysis

1. Correlation

analysis

3. Multiple

regression analysis

3. Multiple

regression analysis

2. Simple

regression analysis

2. Simple

regression analysis

Correlation-regression

analysis

Correlation-regression

analysis

Simple regression analysis is a statistical approach to predicting a dependent variable such as sales, using one independent variable such as advertising expenditures.

Simple regression analysis is a statistical approach to predicting a dependent variable such as sales, using one independent variable such as advertising expenditures.

A correlation analysis helps calculate the strength of the association between two variables. Correlations do not imply cause and effect.

A correlation analysis helps calculate the strength of the association between two variables. Correlations do not imply cause and effect. Multiple regression analysis

is a statistical approach to predicting a dependent variable, such as sales, using several independent variables, such as advertising expenditures and price simultaneously.

Multiple regression analysis is a statistical approach to predicting a dependent variable, such as sales, using several independent variables, such as advertising expenditures and price simultaneously.


Criteria for Evaluating Forecasting Methods

1. Comprehensibility: Sales managers must understand the basic methods of developing forecasts.

2. Accuracy: A forecasting method must provide results that are sufficiently accurate for the purpose desired.

3. Timeliness: The forecasting method must generate forecasts in time for managers to use them.

4. Quality and quantity of information: In forecasting as in other areas, “garbage” input leads to “garbage” output (GIGO).


Criteria for Evaluating Forecasting Methods

5. Qualified personnel: Experts can give opinions on qualitative techniques like the jury of executives’ opinions or the Delphi method.

6. Flexibility: Managers continually monitor actual sales for any deviations from forecast that may indicate the need for revised sales forecasting tools.

7. Costs/benefits: The benefits from forecasting must more than offset the costs of generating the sales forecast.


Sales Budget Planning

1. Planning function

1. Planning function

3. Controlling

function

3. Controlling

function

2. Coordinating

function

2. Coordinating

function

Sales budget

uses

Sales budget

uses

The control function of a sales budget is to evaluate actual results against sales budget expectations.

The control function of a sales budget is to evaluate actual results against sales budget expectations.

Budgeting is an operational planning process expressed in financial terms, which provides a guide for action toward achieving the organization’s objectives.

Budgeting is an operational planning process expressed in financial terms, which provides a guide for action toward achieving the organization’s objectives. Sales budgets must be closely

integrated with budgets for other marketing functions.

Sales budgets must be closely integrated with budgets for other marketing functions.

A sales budget is a financial sales plan outlining how to allocate resources and selling efforts to achieve the sales forecast.

Differences between them are known as budget variances.


Benefits of Preparing the Annual Sales Budget

The following are benefits of preparing the annualsales budget:• ensure a systematic approach to allocation

resources• develop the sales manager’s knowledge of

profitable resource use• create awareness of the necessity of coordinating

selling efforts with other divisions of the company• establish standards for measuring the performance

of the sales organization• obtain input from all areas of the company in the

profit-planning process


Budget Preparation Steps

6.Implement the budgetand provide periodic

feedback

6.Implement the budgetand provide periodic

feedback

5. Prepare a budget

presentation

5. Prepare a budget

presentation 4.

Develop a preliminary allocation of

resources

4. Develop a preliminary

allocation of resources

3.Identify specific market

opportunities and problems

3.Identify specific market

opportunities and problems

2.Communicate sales

goals and objectives

2.Communicate sales

goals and objectives

1. Review and analyze

the situation

1. Review and analyze

the situation

Budgetpreparation

steps

Budgetpreparation

steps

Common line items in sales budgets include these:salariesdirect selling expensescommissions and bonusespromotional materialsadvertising

Common line items in sales budgets include these:salariesdirect selling expensescommissions and bonusespromotional materialsadvertising

All management levels must be fully informed about sales goals and objectives.

All management levels must be fully informed about sales goals and objectives.

Sales managers must provide early warning of budget overruns and ensure that sales revenue and cost ratios remain within reasonable budget limits.

Sales managers must provide early warning of budget overruns and ensure that sales revenue and cost ratios remain within reasonable budget limits.

Succinct, well-reasoned written and oral budget presentations can be used to ask for increased allocation of funds.

Succinct, well-reasoned written and oral budget presentations can be used to ask for increased allocation of funds.

Sales managers and salespeople should use budget resources to pursue specific market opportunities and deal with problems on a timely basis.

Sales managers and salespeople should use budget resources to pursue specific market opportunities and deal with problems on a timely basis.

Assign resources to particular activities, customers, products, and territories.

Assign resources to particular activities, customers, products, and territories.


Statistical Software for Sales Budgeting

• To read an interesting article about sales budgeting software, go to– http://www.ferret.com.au/articles/z1/view.asp?

id=101285 • To learn about a sales budgeting software go to

– http://www.managingautomation.com/maonline/directory/product/Data_Perceptions_Prophecy_Sales_Forecasting_and_Budgeting_Software_3604491


Articles on Sales Budgeting

• To augment your understanding of the link between sales forecasting and budgeting, go to– http://www.allbusiness.com/accounting-reporting/

budget-budget-forecasting/977-1.html

• To broaden your understanding of sales budgets in international operations, go to– http://findarticles.com/p/articles/mi_m0OOL/

is_2_5/ai_n6118710/pg_5


Ethical Situation: What Would You Do?

Discussion Question As one of the newer district sales managers for a fast-growing technology company, you’ve asked your salespeople to give you three sales forecasts in their territories for the coming year: (a) optimistic, (b) pessimistic, and (c) most likely. After totaling their three different sales forecasts, you realize that the optimistic forecast will increase sales by nearly 20% in your district, the pessimistic forecast by 10%, and the most likely by about 15%. Your national sales manager has asked each district sales manager to give her their most likely sales forecast for the coming year, so she can assign sales quotas. Your thoughts are that it’s probably best to give her the most pessimistic sales forecast because this should help ensure that she assigns your district a quota that you should easily achieve. If you can exceed your assigned district sales quota by a substantial amount, you’ll probably get a large bonus, and you may even be named district sales manager of the year for your company. You know that your company’s production schedules are based on the annual sales forecasts, but you plan to be very aggressive early in the year in ordering products to make sure you get more than your share for your salespeople before possible inventory shortages come later. You don’t see any personal down side to this strategy.

chapter 5 sales forecasting and budgeting powerpoint presentation prepared by dr. rajiv mehta new...

Documents

sales potential

total sales

sales plan

sales records

important sales

sales expectations

annual sales budget

benefits of sales budgets