Chapter Summary

The sales forecast is the basis of most corporate planning. From the forecast, the company plans activities and determines production levels. Should the forecast be in error, management may face serious consequences.

The company sales forecast is closely related to the market potential of the products or services it sells. Thus, the forecasting process begins with understanding the firm’s market and sales potentials. The basic techniques for determining market potentials are market-factor estimations, surveys of buyer intentions, and test markets. Territory potentials are determined by using a market index to approximate the total sales potential among the territories.

Good forecasting rests on a careful analysis of the factors that affect sales of the product. A perceptive analysis of buyers or end users and their reasons for purchase or use should play a significant role in the sales forecasting process. The impact of changes in the firm’s marketing plans must also be incorporated into the forecast.

Many different sales forecasting methods are available to managers. One group relies on surveys of executives, customers, and the sales force to derive the forecast. A second group applies mathematical methods to company records or historical data to yield a sales forecast. A third group employs methods linked to the operation of the company to forecast sales. Each of the forecasting methods possesses several advantages and disadvantages, which both the forecaster and the firm should clearly understand before the forecasting process begins.

The budget is a financial plan that the manager uses to plan for profits by anticipating revenues and expenditures. Budgeting serves several purposes: planning, coordination and control, and evaluation. There are primarily two methods of budgeting. First is the percentage-of-sales method, whereby expenses are estimated as a percentage of sales. Second is the objective-and-task method, where the manager determines the tasks necessary to achieve the objectives and then estimates the costs of performing these tasks. Both methods rely on developing an accurate sales forecast.

There are three basic budgets for the sales department. These are the sales budget, the selling-expense budget, and the administrative budget.

The budgetary process begins in the sales department with the formulation of a sales forecast. From that figure, a detailed sales budget is developed that contains the expected sales of each item in the product line. The production budgets and the selling-expense budgets are developed from the sales budget.

Once the sales forecast and budgets are developed, they become the standard by which the manager judges performance.