Concept Of Sales Forecast
Financial forecasting is a significant part of financial planning process. The financial forecasting begins with sales forecast. Sales forecast is a forecast of firm's future sales both in terms of volume and value. The sales forecast always begins with analyzing the historical trends in sales over the past periods. It also takes to consideration the future economic prosperity if given line of business. To determine the forecasted sales growth, the firm must rely on competitive market conditions, customers' tastes and preferences, change in technology and future possibilities of market expansion. Nowadays, several statistical methods like regression analysis, time series analysis, econometric models are used to consider all these factors in providing sales forecasts.
Factors To Be Considered For Sales Forecasting
Some factors that should be considered while developing sales forecast are as follows:
1. Provide a projection of divisional sales based on historical growth and combine the divisional sales forecasts to provide a approximate corporate sales forecast.
2. Forecast the level of economic activity in each market area of the firm along with the change in population and their economic growth.
3. Estimate the market share of the firm that is expected in each market area depending on the firm's production and distribution capacity, capacity of competitors, possibility of new product and so on.
4. Forecast the effect of future rate of inflation in the consumer's purchasing power and price of products.
5.Consider the effect of advertisement campaigns, price discounts, credit terms and so on.
6. Provide the ultimate forecasts of sales for each division in aggregate and on an individual product basis.
The accurate sales forecast must be as accurate as possible. If it is overly optimistic, the firm may have idle plant capacity and unnecessary investment in inventories. If the sales forecast is overly pessimistic, it may result into loosing the customers because of failure to meet demand. Both of these conditions result into low profit margin, low return on assets, low return on equity and decline in market price of share. Therefore, accurate sales forecast is significant to improve profitability of the firm.
