The Sales Budget The sales forecast provides the framework for the detailed planning presented in the master budget of an organisation. Based on planned strategies and its best business judgment, management converts a sales forecast into a sales plan through the commitment of resources and the establishment of control mechanisms. The sales budget provides an evaluative tool by presenting monthly indexes of volume of units and returns as hard targets for the sales team.
Deviations from these indexes indicate to small business owners and managers where they need to adjust their efforts to take advantage of hot products or to remedy difficult situations. Management determines its sales policies and strategies within its ability to respond to customer needs, technological changes, and the financial prerequisites of marketing. The sales budget projects that portion of potential sales the sales team believes it can achieve. The forecast, then, sets the parameters on the top side while the production capacity and sales acumen of the team sets the floor.
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Although sales forecasts may accurately project significant changes in market conditions, a company needs to thoroughly examine its own resources to determine its ability to respond to these changes. A huge drop in demand may decrease the strain on the production process to where a company regains cost efficiencies, or a large increase in demand might be required by a company that needs cash for other projects. The sales budget, therefore, is predicated on a company’s ability to meet expected demand at or near its maximum profit potential.
Sales Forecasting Sales forecasting on the other hand is the prediction of the future sales of a particular product over a specific period of time based on past performance of the product, inflation rates, unemployment, consumer spending patterns, market trends, and interest rates. In the preparation of a comprehensive marketing plan, sales forecasts help the marketer or manager develop a marketing budget, allocate marketing resources, and monitor the competition and the product environment.
The sales forecast is a prediction of a business’s unit and revenue sales for some future period of time, up to several years or more. These forecasts are generally based primarily on recent sales trends, competitive developments, and economic trends in the industry, region, and/or nation in which the organization conducts business. Sales forecasting is management’s primary tool for predicting the volume of attainable sales. Therefore, the whole budget process hinges on an accurate, timely sales forecast.
These technical projections of likely customer demand for specific products, goods, or services for a specific company within a specific time horizon are made in conjunction with basic marketing principles. For example, sales forecasts are often viewed within the context of total market potential, which can be understood as a projection of total potential sales for all companies. Market potential relates to the total capacity of the market to absorb the entire output of a specific industry. On the other hand, sales potential is the ability of the market to absorb or purchase the output from a single firm.
Forecasting methods and levels of sophistication vary greatly. Each portends to assess future events or situations which will impact either positively or negatively on a business’s efforts. Managers prepare forecasts to determine the type and level of demand for both current and potential new products. They consider a broad spectrum of data for indications of growing and profitable markets. Forecasting, however, involves not only the collection and analysis of hard data, but also the application of business judgment in their interpretation and application.
For example, forecasting requires business owners and managers to not only estimate expected units sold, but also to determine what the business’s production (materials, labor, equipment) costs will be to produce those items. Factors in Sales Forecasting Sales forecasts are conditional in that a company prepares the forecast prior to developing strategic and tactical plans. The forecast of sales potential may cause management to adjust some of its assumptions about production and marketing if the forecast indicates that: current production capacity is inadequate or excessive, and or sales and marketing efforts need revisions.
Management, therefore, has the opportunity to examine a series of alternate plans that propose changes in resource commitments (such as plant capacity, promotional programs, and market activities), changes in prices and/or changes in production scheduling. Through forecasting the company determines markets for products, plans corporate strategy, develops sales quotas, determines the number and allocation of salespeople, decides on distribution channels, prices products or services, analyzes products and product otential in different markets, decides on product features, determines profit and sales potential for different products, constructs advertising budgets, determines the potential benefits of sales promotion programs, decides on the use of various elements of the marketing mix, sets production volume and standards, chooses suppliers, defines financing needs, and determines inventory standards. For the forecasting to be accurate, managers need to consider all of the afore mentioned factors: