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Sales budget & forecasting

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Sales budget & forecasting

  1. 1. Sales Budgets 1
  2. 2. Sales Budget • Why a Sales Budget? 2
  3. 3. Benefits of Budgeting a) Improved Planning: Action to be taken is described in quantitative terms. 3
  4. 4. Benefits of Budgeting a) Improved Planning: Action to be taken is described in quantitative terms. b) Better coordination & communication: All departments have budgets which give future course of action – interaction between departments. Eg. Increased Sales Increased Production Increased Finance Increased MIS / HR 4
  5. 5. Benefits of Budgeting c) Control & performance evaluation Control & performance evaluation: Budgets outline objectives and responsibilities so performance evaluation and control is easy. Eg. Expense monitoring, d) Psychological benefits: Instills profit orientation / expense control / culture in organization 5
  6. 6. Types of Budgets a) Sales Budget 6
  7. 7. Types of Budgets a) Sales Budget  Detailed Plan showing the Expected Sales for a Future Period ….  Developed based on expected revenue (S- forecast)  Gives sales by geographically location / product service / sales people & customers  First part of Master Budget; Usually forms the basis for other operational budgets like finance & production. 7
  8. 8. Types of Budgets b) Selling – Expense Budget  Salaries / Commissions  Traveling / Entertainment  Training (new products) 8
  9. 9. Types of Budgets b) Selling – Expense Budget  Salaries / Commissions  Traveling / Entertainment  Training (new products) c) Administrative Budget & Profit Budget, Rent, Electricity, Office Furniture, Stationery GP = sales revenue – sales expenses 9
  10. 10. Methods of Budgeting for Sales Force a) Affordability Method: Management develops SB depending on ability to spend on sales function; usually fall short of sales dept’s requirements b) Percentage of Sales Method: Multiply sales revenue by a given %; Sales revenue = Past revenue / forecasted figure / weighted average of both c) Competitive Parity: Based on budgeted figure of competitors or industry average; competitor comparable in size and revenue is chosen 10
  11. 11. Types of Budgets d) Objective & Task: a), b), c) do not take cognizance of organization’s objective in developing budget.  Identify objective with employees  Identify tasks for achieving objective  Expenditure required  Form budget e) Return Oriented Method: ROI, ROA, ROTA, ROAM (Assets Management) 11
  12. 12. Successful Budgeting 12
  13. 13. Successful Budgeting • Involvement & Support of Top Management Support Budgeting & ensure all-round participation; should not be viewed as a pressure tactic but as an effective tool for performance; ii. Flexibility in Budgeting Should be adjustable to fast changing environmental conditions 13
  14. 14. How to develop a Sales Budget 14
  15. 15. How to develop a Sales Budget 1. Review and Analysis Collection of past data and study of variances between projected and actual 2. Identifying market opportunity and problems 3. Sales forecasting 4. Communication of Sales goals & objectives Involvement of sales people is essential for mutual agreement 15
  16. 16. How to develop a Sales Budget 5. Allocation of resources Selecting salespeople, tools of sales, financial resources 6. Preparing the budget Balance between sales force capability and market opportunities 7. Approval for the budget 16
  17. 17. Sales Forecasts 17
  18. 18. • Market Potential Vs Sales Potential 18
  19. 19. Sales Forecasts 1. Market Potential: Maximum possible sales opportunities in part. mkt. segment, over a future period, assuring application of appropriate marketing methods. 2. Sales Potential: maximum possible sales opportunity for specific company in part. Mkt. segment over future period. MP : Total Industry SP : Part. Co. 19
  20. 20. Sales Forecasts 3. Sales Forecast: In Re/Units, how much of a company’s product can be sold over a future period, under a given marketing program on assumed set of external factors. 20
  21. 21. Market Potential Analysis i. Market identification ii. Ability to buy iii. Willingness to buy Sources of Data: a) Secondary: Environment Analysis b) Primary: Customers spending patterns, preferences 21
  22. 22. Why is SP different from SF? 22
  23. 23. Why is SP different from SF? i. Inadequate Production Capacity ii. Inadequate Distribution iii. Inadequate Finances iv. Profit Orientation: Profitable Sales vs. Possible Sales 23
  24. 24. Analyzing Market Potential i. Top down: Top mgmt. assesses market on basis of macro environmental data ii. Bottom up: Micro enviro. factors of market like customer, products, ability to buy etc. are analyzed by lower management 24
  25. 25. Sales Forecasting Method i. Qualitative Forecasts a) Judgment Methods b) Counting Methods 25
  26. 26. Judgment Methods 1. Delphi Technique: Systematic Method for obtaining consensus from a group of experts. 2. Nominal Group Technique: Experts from diverse backgrounds 3. Jury of Executive Opinion: Opinions of executives at top level, based on experience & utilization – Lacks scientific validity senior most opinion prevails. 26
  27. 27. Counting Methods 1. User Expectations: Usually for industrial products by directly getting data from customers. 2. Sales Force Composite: Estimate of expected sales from every salesperson; can over/under estimate, lack broader perspective. 3. Market Tests: Limited area consumer acceptance. 27
  28. 28. Quantitative Forecasts 1. Time Series Analysis: Estimation of future trends based on past performance; Long Term Forecasts Sales = T (long term variations × C (cyclical variations) × S (Seasonal changes) × I (Irregular changes in environment) 28
  29. 29. Quantitative Forecasts 2. Moving Average: Sales forecasts on sales of previous period: assumes environmental irregularities in past will be there in present. (Sales t +Sales t −1 +Sales t −2 ....... +Sales t −n Sales t +1 = n 29
  30. 30. Quantitative Forecasts 3. Exponential Smoothing Refines (2) – More weightage to sales in recent periods vis-à- vis older periods. 30
  31. 31. Quantitative Forecasts 4. Regression & Correlation (Multiple Regression) Correlation: Degree of relationship between sales & other variables. Regression: Identify factor that influence sales & predicts changes in one variable due to changes in other.  Most popular & widely used method  Identifies relationship between sales and other independent factors on which sales is dependant. 31
  32. 32. Which method to use? a) Accuracy: Quantitative better than qualitative, short term: exponential method is accurate; more than six months: exponential smoothing and moving averages more than one year: regression b) Costs c) Data availability d) Software availability: models and applications for forecasting need different types of data e) Companies experience in forecasting 32
  33. 33. Forecasting is effective if it is: 33
  34. 34. Forecasting is effective if it is: a) Accurate b) Cost effective c) Comprehensible d) Timely e) Flexible f) Plausible: Has to be done with sincerity hence no manipulation of figures under pressure can be allowed; Top Management has to be willing to face accurate estimates even if they are not rosy. g) Durable: By using quantitative techniques, combining forecasting techniques; using software. 34

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