Sales Forecasting

Sales forecasting is defined as a projection into the future of expected demand, given a stated set of environmental conditions. This is distinguished from the sales plan, which we here define as a set of specified managerial actions to be undertaken to meet or exceed the sales forecast. Notice that our definition of a sales forecast does not specify the technique (quantitative or qualitative), does not specify who [Page 496]develops the forecast within the company, nor does it include managerial plans. Managerial plans for the level of sales to be achieved should be based on the forecast of demand, but the two management functions should be kept separate. For this reason, our definition of the sales plan (or any other managerial plans, for that matter) does not include the activities of making projections of demand levels.

Notice that these definitions imply different performance measures for sales forecasts than for sales plans. Because the goal of sales forecasting is to make the projections within a defined environment, a key measure of performance is accuracy of the forecast, and a key method to explain variances in accuracy is how the environment varied from the one defined. This explanation is not intended to excuse forecast inaccuracy but rather to help us understand the business environment and forecast more accurately in the future.

In contrast, the goal of the sales plan is not to achieve accuracy, but rather to meet, and in some cases to exceed, the plan. The purpose of the sales plan is not to accurately project future demand levels. It is to provide sales goals for marketing and sales based on this projected future demand, and the motivation to meet or exceed these goals.

If we can simply set a sales goal and expect marketing and sales to exceed it, why do we even need a sales forecast in the first place? This is a question many managers ask and often answer incorrectly (saying, “We do not need a forecast”), to their eventual sorrow.

The correct answer is that every time we develop a plan of any kind, we first make a forecast. This is as true of individuals as it is of profit and not-for-profit companies, government organizations, and in fact any entity that makes a plan. It can be as simple as planning what we will wear tomorrow. When we decide to wear wool slacks and a sweater, we are forecasting it will be cool. If we add an umbrella to our ensemble, we are forecasting rain. The plan was predicated on the forecast, whether we consciously thought about it or not.

This is not much different from a company making financial plans based on expected demand and the costs of meeting that demand. The trick is not to get caught in the trap of making “inadvertent sales forecasts.” Inadvertent sales forecasts are made when we are so intent on developing the plan that we simply assume what demand will be, rather than giving any concentrated thought and analysis to the market conditions that will be necessary to create this level of sales.

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