Sales Budget & Sales Forecasting

Sales Budget is an estimate of future sales, often broken down

into units or dollars. It is used to create company sales goals. It
is an effective instrument for planning and control. Budgets
are company’s objectives and strategies
expressed in numerical terms.
The Sales Budget is a blueprint for making
profitable sales.

Dr. T. K. Chatterjee
 Learning Objectives :

To understand : :

• Definition and concept of Sales Budget

• Purpose and Benefits of Sales Budget
• Principles of budgeting
• Types of Sales Budget
• Methods of Budgeting
• Steps in preparing a Sales Budget
• Precautions in preparing a Sales Budget
• Sales Forecasting : Importance/Techniques

Refer : Ingram & LaForge, Cron & Decarlo, Panda & Sahadev,
Jobber & Lancaster, Still, Cundiff, Govoni & Puri
Recommended book : : :
Chapter 4 & 7
Read Chapter 16
Read Chapter 17
 Sales Budget : Some Definitions
A Budget captures and reflects the results of the planning
decisions in a formal and integrated way. Thus, Budget, is a
tool to operationalise the plans.
Dominiak & Louderback III (1985)

Budget is a tool, a financial plan that an administrator uses to

plan for profits by anticipating revenues and expenditures.
Spiro et al.(2003)

A Sales Budget is essentially a set of planned expenses that is

prepared on an annual basis.
Dalrymple & Cron (1995)
of
 Principles Of Budgeting
To get the real benefits of budgeting a firm should follow
Following principles : :

All employees must be involved in the process

It should be practical and gain acceptance in the organization

Outputs must be linked with inputs

It should have flexibility to accommodate environmental factors

The management should continuously learn

 Types Of Budgets

• Sales Budget (sales target/quota)

• Selling-Expense Budget

• Administrative Budget & Profit Budget

 Selling Expense Budget
Where to spend it ?
• Salesforce salaries, commissions and bonuses
• Retirement Plans (PF/Gratuity etc.)
• Hospitalization and Life Insurance (Bajaj Allianz in case of
our alumnus spent more than Rs.10 lacs)
• Automobile (fuel & maintenance)
• Travel, meal, lodging and entertainment
• Office supplies and postages etc
• Office rent and utilities
• Clerical and secretarial services
• Recruitment & Training
• Samples and other sales aids

Sales Manager has flexibility within

total budget allotted
 The Administrative Budget

The administrative or administration budget is the amount of

money it takes to run your company. It's defined in accounting
as the part of your budget that isn't related to sales,
construction or manufacturing. The administration budget
appears on the income statement as general and
administrative expenses.
Conditions For Successful Budgeting

Involvement & Support Of Top Management

Flexibility In Budgeting : Particularly important for

Manufacturing & Distribution Firms
 Steps In Developing A Sales Budget
• Review and Analysis of the situation

• Identifying specific market opportunities and problems

( Customer-Product Matrix : Next slide)

• Sales Forecasting Leads to budget

• Communicate sales goals and objectives to sales team

• Preliminary allocation of resources

• Preparing the budget

• Getting the budget approved

Analyzing the basic revenue generating avenues
Helpful in determining expense budget

Need hunters Require more budget

Telemarketing & service

Need Relationship
support
approach
Sales Forecasting : What is Market Potential ?
“Market Potential is an estimate of maximum demand in a
time period based on the number of potential users and
their purchase rate”. (Cron & Decarlo)
 Sales Forecasting : Sales Manager’s
responsibility

Sales Forecasting leads to budget preparation.

Sales Forecasting is primarily Sales Manager’s

responsibility.

Sales Forecasting procedures must be taken

seriously since, from it, business plans emerge !

Jobber & Lancaster (page 490)

 Sales Forecasting : Time Horizon

Short-term Forecasts generally up to 3 months

Medium-term Forecasts normally for 1 year

Long-term Forecasts normally for 3 years and more

 Functions affected by Sales Forecast
• Production
• Purchase
• Human Resource Management
• Costing & Financial Accounting
• Research & Development
• Marketing----------sales strategies and promotional plans
 Sales Forecasting
Market potential estimation leads to sales forecasting.

Methods of Sales Forecasting : :

Qualitative Methods : User expectations

Sales force composite

Jury of Expert opinion

Delphi technique : Members do not

meet, a project leader administers a
questionnaire
Refer : Tapan Panda & Sahadev
 Quantitative Methods

Quantitative techniques can be divided into two types : : :

• Time Series Analysis : Time Series Methods use

chronologically ordered raw data. Historical data
are used to project future events.

• Causal Techniques
 Sales Forecasting
Quantitative Methods : Time series analysis : S= T X C X S X I
Link : https://youtu.be/GUq_tO2BjaU

Moving average

Method of Semi-Averages

Exponential Smoothing : https://youtu.be/hi3CoA9-hvg

Regression and correlation analysis

https://youtu.be/ZaxpCw6lCe4
Multiple regression model

The best α value : https://youtu.be/GGse591r4zo

For better understanding of Time Series and Forecasting
Refer : Chapter 15
Computer based Forecasting Techniques

Box-Jenkins : A sophistication of the Exponential

Smoothing technique

X-11 : developed by Julius Shiskin, a decomposition

technique

Jobber & Lancaster, page 506-507

Interested students are advised to know further details

from other sources
X-11
 Miscellaneous Forecasting Techniques

Causal : : :

Leading Indicators

Simulation

Diffusion Models : When a ‘new to the

world product’ is introduced to the market,
sale of Video cassette recorder was forecasted
applying this technique

Jobber & Lancaster

 Sales Forecasting : Quantitative Methods

As future Sales Managers you need to appreciate that some

of these techniques are very complex in nature and require
Specialist skills. If forecasting needs special mathematical
Techniques, the answer is to consult a specialist.

You must understand their usefulness and applicability !

To be a successful Sales Manager you need not

be a statistician or a mathematician.

Jobber & Lancaster, page 499

 Exponential Smoothing Forecast

Basically you have to add “forecast for the last period” to

multiplication of “smoothing constant and forecasting error
for the last period.”

https://youtu.be/vGR2ebAQkrg
Trend Projection : Using MS Excel

1 35.46
2 39.38
3 46.43
4 49.39
5 39.48
6 36.47
7 40.46
8 39.88
9 49.54
10 48.98
11 46.54
12 49.56
13 52.45
14 53.21

15 52.53077
Moving Average : Use of MS Excel

35.46 #N/A
39.38 #N/A
46.43 40.42333
49.39 45.06667
39.48 45.1
36.47 41.78
40.46 38.80333
39.88 38.93667
49.54 43.29333
48.98 46.13333
46.54 48.35333
49.56 48.36
52.45 49.51667
53.21 51.74
Assumed interval 3 years
 Exponential Smoothing : Use of MS Excel
35.46 #N/A
39.38 35.46
46.43 36.244
49.39 38.2812
39.48 40.50296
36.47 40.29837
40.46 39.53269
39.88 39.71816
49.54 39.75052
48.98 41.70842
46.54 43.16274
49.56 43.83819
52.45 44.98255
53.21 46.47604

Smoothing Constant “a” == 0.2 Damping Factor = 0.8

 Choosing A Forecasting Method

Accuracy

Costs

Type of Data available

Requirements of the software

Experience of the company

 Criteria For Effective Forecasting
Accuracy

Plausibility : To be done with openness and sincerity

Durability : Apply a combination of techniques

Flexibility : Market volatility must be taken into account

Availability of Statistical Indexes

Organizational participation

Demand pattern in the Market

Problems with Forecasting

• Lack of adequate sales history

• Lack of time, money and qualified personnel

• Changing customer attitudes

• Fashions and fads

 Selecting Forecasting Method
Most sales forecasting uses computer programs today.
Adjustments are then made to computer generated forecasts
with judgmental procedures.

Simple procedures such as ‘Moving Averages’ and

‘Exponential Smoothing’ have lower forecasting errors than
other complex methods.

Rarely one technique is best in all situations, so best solution

is to base one’s prediction on the average of several methods
to help reduce forecasting errors.

“After all, predicting future is not an easy task,

not even in science, like medical science !!”
 Research findings in Sales Forecasting

Abstract
This paper presents results of a survey designed to
discover how sales forecasting management practices
have changed over the past 20 years as compared to
findings reported by Mentzer and Cox (1984) and
Mentzer and Kahn (1995). An up‐to‐date overview of
empirical studies on forecasting practice is also
presented. A web‐based survey of forecasting
executives was employed to explore trends in
forecasting management, familiarity, satisfaction,
usage, and accuracy among companies in a variety of
industries. Results revealed decreased familiarity
with forecasting techniques, and decreased levels
of forecast accuracy. Implications for managers
and suggestions for future research are
presented.  Copyright © 2006 John Wiley & Sons, Ltd.
A benchmarking study conducted on 20 leading US firms
reveals dissatisfaction regarding their current sales
forecasting techniques. The study also showed that firms
with relatively more sophisticated forecasting techniques
tend to continuously improve on their methods.

This article presents the results of a survey to determine

the degree of familiarity and usage, accuracy obtained,
and evaluation of different forecasting techniques. It was
found that regression analysis, subjective techniques,
exponential smoothing, and moving average were well
known and used for specific situations. Accuracy was
relatively high for aggregate short range forecasts, but
decreased for longer range and product level forecasts.
Citing Literature
 Conclusion : Sales Forecasting remains an enigma for
Sales Managers
Abstract
Two studies were conducted to examine expert opinions of criteria used to
select forecasting techniques. In Study One, while “accuracy” was a
dominant criterion, the ratings of five of thirteen criteria varied by the role of
the forecaster. Researchers rated accuracy relatively higher than did
practitioners, educators or decision-makers. Decision makers rated
implementation-related criteria, such as “ease” criteria, relatively higher
than the other groups. In Study Two, forecasting experts significantly
varied their ratings on six of seven criteria according to situations. Other
criteria were often as important or more important than accuracy,
especially when the situation involved making many forecasts. In general,
there was much agreement across roles and across situations that
accuracy was the most important criterion, but other criteria were rated as
being almost as important. In particular, factors related to implementation,
such as ease of interpretation and ease of use, were highly rated.
 Related Links

https://youtu.be/Bw3pmfsBjpg

https://youtu.be/k9dhcfIyOFc
https://youtu.be/U0dF8uJs3mE
https://youtu.be/uV4g9p08nXg
https://youtu.be/ca0rDWo7IpI
https://youtu.be/-fgGGaBGt24
https://youtu.be/bHwohMjG9OA
https://youtu.be/GkazJtDO2Fg

https://youtu.be/7Hphv79OZJY
 CONCLUSION
A Budget is a plan expressed in numerical/monetary terms.
it helps in allocating company’s resources to given activities
for a specified period of time. It serves two core purposes of
being a mechanism for control and an instrument of planning.

There are three types of budgets : Sales Budget

Selling Expense Budget
Administrative Budget

Duly handled Sales Budgets may be an effective tool to

enhance profitability of an organization.

Prof. (Dr.) T. K. Chatterjee