Sales forecasting Sales forecasts are common and essential tools used for business planning, marketing, and

general management decision making. A sales forecast is a projection of the expected customer demand for products or services at a specific company, for a specific time horizon, and with certain underlying assumptions.

Forecasts of different kinds are often prepared at different levels of a corporate enterprise. Managers of different stripes use forecasts for a variety of purposes, including marketing planning, resource\investment allocation, production scheduling, and labor recruitment. In some cases the uses are simply informational, but in many cases forecasts are the basis for major decisions like:

what product lines to pursue how much to spend on production and in what ways how aggressively to advertise or promote the products how best to get the products to market in order to fulfill the projected demand

A sales forecast may cause management to adjust some of its assumptions or decisions about production and marketing if the forecast indicates that (1) the current production capacity is grossly inadequate or excessive and (2) sales and marketing efforts are inconsistent with the expected outcomes. Management therefore has the opportunity to examine a series of alternate plans for changes in resource commitments (such as plant capacity, promotional programs, and market activities), changes in prices, or changes in production scheduling. Indeed, when a company is evaluating different courses of action it may develop separate forecasts for each option in order to assess the implications of each.

Forecasting involves more uncertainties than most other management activities. For instance, while management exerts a good deal of control over expenditures, it has little ability to direct the buying habits of its customers. Thus, even while sales trends depend on the vagaries of the marketplace, management must make a reasonable estimate of what the future holds in order to plan corporate affairs effectively. The process managers or analysts go through to create a sales forecast is similar to this:

1. Determine the purposes of the forecast (e.g., for purchasing, strategic planning, etc.). 2. Divide the company's products into homogeneous (or at least relevant) categories. 3. Determine the major factors affecting the sales of each product group and their relative importance. 4. Choose one or more forecasting methods based on the kind of data available and the sophistication needed in the forecast. 5. Gather all necessary data. 6. Analyze the data. 7. Check and cross-check any adjustments to the data (e.g., price indexing or seasonal adjustments). 8. Make assumptions regarding any effects of the various factors that can't be measured or forecast. 9. Convert deductions and assumptions into specific product and territorial forecasts and quotas. 10. Apply forecasts to company operations. 11. Periodically review performance and revise forecasts. While forecasting is still neither effortless nor flawless, the gap between forecasts and reality has steadily narrowed over time. There are several ways that a company can improve the likelihood of creating an accurate sales forecast and using it effectively:

using more than one forecasting technique abandoning or modifying a specific technique when it has proven unreliable for the company's needs remembering that forecasts are highly conditional carefully monitoring market developments for changes that contradict the underlying assumptions of the forecast conducting periodic reviews and making changes when necessary

Qualitative vs. Quantitative Methods Qualitative forecasting techniques are subjective, based on the opinion and judgment of consumers, experts; appropriate when past data is not available. It is usually applied to intermediate-long range decisions. Example of qualitative forecasting methods:

Informed opinion and judgment Delphi method Market research Historical life-cycle Analogy.

Quantitative forecasting models are used to estimate future demands as a function of past data; appropriate when past data is available. It is usually applied to short-intermediate range decisions. Example of Quantitative forecasting methods:

Last period demand Arithmetic Average Simple Moving Average (N-Period) Weighted Moving Average (N-period) Simple Exponential Smoothing Multiplicative Seasonal Indexes

Nave Approach Nave forecasts are the most cost-effective and efficient objective forecasting model, and provide a benchmark against which more sophisticated models can be compared. For stable time series data, this approach says that the forecast for any period equals the previous period's actual value. Time series methods Time series methods use historical data as the basis of estimating future outcomes.

Moving average Weighted moving average Exponential smoothing Autoregressive moving average (ARMA) Autoregressive integrated moving average (ARIMA)

Extrapolation

Linear prediction Trend estimation Growth curve

Causal / econometric forecasting methods Some forecasting methods use the assumption that it is possible to identify the underlying factors that might influence the variable that is being forecast. For example, including information about weather conditions might improve the ability of a model to predict umbrella sales. This is a model of seasonality which shows a regular pattern of up and down fluctuations. In addition to weather, seasonality can also be due to holidays and customs such as predicting that sales in college football apparel will be higher during football season as opposed to the off season. Casual forecasting methods are also subject to the discretion of the forecaster. There are several informal methods which do not have strict algorithms, but rather modest and unstructured guidance. One can forecast based on, for example, linear relationships. If one variable is linearly related to the other for a long enough period of time, it may be beneficial to predict such a relationship in the future. This is quite different from the aforementioned model of seasonality whose graph would more closely resemble a sine or cosine wave. The most important factor when performing this operation is using concrete and substantiated data. Forecasting off of another forecast produces inconclusive and possibly erroneous results. Such methods include: Regression analysis includes a large group of methods that can be used to predict future values of a variable using information about other variables. These methods include both parametric (linear or non-linear) and nonparametric techniques.

Autoregressive moving average with exogenous inputs (ARMAX)

Judgmental methods Judgmental forecasting methods incorporate intuitive judgements, opinions and subjective probability estimates.

Composite forecasts Surveys Delphi method

Scenario building Technology forecasting Forecast by analogy

Artificial intelligence methods

Artificial neural networks Group method of data handling Support vector machines

Other methods

Simulation Prediction market Probabilistic forecasting and Ensemble forecasting Reference class forecasting