Chapter 5

1. Chapter 5 Sales Forecasting and Budgeting PowerPoint presentation prepared by Dr. Rajiv Mehta New Jersey Institute of Technology

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

3. Learning Objectives After reading this chapter, you should be able to do the following: • Relate sales forecasting to operational planning. • Use the most popular quantitative and qualitative sales forecasting tools. • Evaluate the various sales forecasting techniques. • Identify the purpose and benefits of sales budgets. • Prepare an annual sales budget.

4. 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.

5. 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

6. Impact of Erroneous Sales Forecasts

7. Analyze sales records. Develop a preliminary forecast. Have managers review and adjust forecast. Build a sales plan around the forecast. Make adjustments to operating plans. Sales and Operational Planning Process (S&OP)

8. Characteristics of Successful S&OP Programs All managerial levels must support the S&OP process and the plans that result. Firms don’t know how well they’re doing unless they measure outcomes. Regular meetings are held. Metrics monitor progress and provide benchmarks. Effective strategy should align supply and inventories with demand. Market intelligence and decision support system are in place for reports that assist in planning.

9. Estimating Industrial Demand Survey potential industrial customers to measure their purchase intentions—the likelihood they will actually purchase a given product. 1. Standardized classification systems Estimating industrial demand approaches 2. Buyer intentions North American Industrial Classification System (NAICS) has replaced the original SIC.

10. Steps in Forecasting Sales Using the Breakdown Approach • Forecast general economic conditions. • Estimate the industry’s total market potential for a product category. • Determine the share of this market the company currently holds and is likely to retain in view of competitive efforts. • Forecast sales potential of the product. • Use the sales forecast for operational planning and budgeting.

11. Sales Forecasting Model: Breakdown Approach

12. Forecasting Approaches and Techniques based on primary research 1. Breakdown approach Forecasting approaches and techniques 2. Build-up approach Forecast economic conditions, such as these: GNP consumer price index wholesale price index interest rates unemployment levels

13. Sales Forecasting Techniques 1. Nonquantitative methods Sales forecasting techniques 2. Quantitative methods

14. 1. Judgment methods Nonquantitative forecasting methods 2. Counting methods Nonquantitative Forecasting Methods • 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

15. 1. Time-series methods Quantitative forecasting methods 2. Causal or association methods Quantitative Forecasting Methods • moving averages • exponential smoothing • Box-Jenkins • trend analysis using ARIMA • correlation-regression • econometric model • Input-output models

16. 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

17. 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/

18. 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/

19. Time-Series Methods • Using historical data to predict sales, forecasters look for the following: • Trendsare movements in a time series as a result of developments in population, technology, or capital formation. • Periodic movementsare consistent patterns of sales changes in a given period generally called seasonal variations. • Cyclical movementsare wave-like movements of sales that are longer in duration than a year, such as business recessions. • Erratic movementsare one-time specific events—such as wars, strikes, snowstorms, hurricanes, fires, and floods—that are not predictable.

20. Time-series methods 2. Exponential smoothing 1. Moving averages 3. ARIMA Types of Time-Series Methods 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. 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. 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.

21. Causal or association methods 2. Econometric models 1. Correlation- regression analysis 3. Input-output models Types of Causal or Association Methods Causal/association methods attempt to identify the factors affecting sales and to determine the nature of the relationship between them. Econometric models are based on a series of regression equations. Input-output models are complex systems showing the amount of input required from each industry for a specified output of another industry.

22. Correlation- regression analysis 2. Simple regression analysis 1. Correlation analysis 3. Multiple regression analysis Correlation-Regression Analysis A correlation analysis helps calculate the strength of the association between two variables. Correlations do not imply cause and effect. Simple regression analysis is a statistical approach to predicting a dependent variable such as sales, using one independent variable such as advertising expenditures. 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.

23. Criteria for Evaluating Forecasting Methods • Comprehensibility: Sales managers must understand the basic methods of developing forecasts. • Accuracy: A forecasting method must provide results that are sufficiently accurate for the purpose desired. • Timeliness: The forecasting method must generate forecasts in time for managers to use them. • Qualityand quantity of information:In forecasting as in other areas, “garbage” input leads to “garbage” output (GIGO).

24. Criteria for Evaluating Forecasting Methods • Qualified personnel:Experts can give opinions on qualitative techniques like the jury of executives’ opinions or the Delphi method. • Flexibility: Managers continually monitor actual sales for any deviations from forecast that may indicate the need for revised sales forecasting tools. • Costs/benefits: The benefits from forecasting must more than offset the costs of generating the sales forecast.

25. Sales budget uses 2. Coordinating function 1. Planning function 3. Controlling function Sales Budget Planning A sales budget is a financial sales plan outlining how to allocate resources and selling efforts to achieve the sales forecast. Budgeting is an operational planning process expressed in financial terms, which provides a guide for action toward achieving the organization’s objectives. The control function of a sales budget is to evaluate actual results against sales budget expectations. Sales budgets must be closely integrated with budgets for other marketing functions. Differences between them are known as budget variances.

26. Benefits of Preparing the Annual Sales Budget The following are benefits of preparing the annual sales 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

27. Budget Preparation Steps Common line items in sales budgets include these: salaries direct selling expenses commissions and bonuses promotional materials advertising Sales managers must provide early warning of budget overruns and ensure that sales revenue and cost ratios remain within reasonable budget limits. All management levels must be fully informed about sales goals and objectives. Sales managers and salespeople should use budget resources to pursue specific market opportunities and deal with problems on a timely basis. Succinct, well-reasoned written and oral budget presentations can be used to ask for increased allocation of funds. Assign resources to particular activities, customers, products, and territories.

28. 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

29. 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

30. 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.