Sales Budget & Forecasting
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Transcript of Sales Budget & Forecasting
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Sales Budgets
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Sales Budget
• Why a Sales Budget?
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Benefits of Budgeting
a) Improved Planning: Action to be taken is described in
quantitative terms.
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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
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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
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Types of Budgets
a) Sales Budget
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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.
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Types of Budgets
b) Selling – Expense Budget Salaries / Commissions Traveling / Entertainment Training (new products)
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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
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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
requirementsb) Percentage of Sales Method: Multiply sales revenue by a given %; Sales revenue = Past revenue / forecasted
figure / weighted average of bothc) Competitive Parity: Based on budgeted figure of competitors or
industry average; competitor comparable in size and revenue is chosen
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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)
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Successful Budgeting
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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
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How to develop a Sales Budget
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How to develop a Sales Budget
1. Review and Analysis Collection of past data and study of variances
between projected and actual2. Identifying market opportunity and problems3. Sales forecasting 4. Communication of Sales goals & objectives Involvement of sales people is essential for mutual
agreement
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How to develop a Sales Budget
5. Allocation of resources Selecting salespeople, tools of sales, financial
resources6. Preparing the budget Balance between sales force capability and
market opportunities 7. Approval for the budget
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Sales Forecasts
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• Market Potential Vs Sales Potential
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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.
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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.
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Market Potential Analysis
i. Market identificationii. Ability to buyiii. Willingness to buySources of Data: a) Secondary: Environment Analysisb) Primary: Customers spending patterns,
preferences
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Why is SP different from SF?
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Why is SP different from SF?
i. Inadequate Production Capacityii. Inadequate Distributioniii. Inadequate Financesiv. Profit Orientation: Profitable Sales vs. Possible
Sales
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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
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Sales Forecasting Method
i. Qualitative Forecastsa) Judgment Methodsb) Counting Methods
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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.
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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.
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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)
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Quantitative Forecasts
2. Moving Average: Sales forecasts on sales of previous period: assumes environmental irregularities in past will be there in present.
nSales.......SalesSalesSales(Sales nt2t1tt
1t
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Quantitative Forecasts
3. Exponential Smoothing Refines (2) – More weightage to sales in recent periods vis-à-vis older periods.
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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.
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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) Costsc) Data availabilityd) Software availability: models and
applications for forecasting need different types of data
e) Companies experience in forecasting
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Forecasting is effective if it is:
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Forecasting is effective if it is:
a) Accurateb) Cost effectivec) Comprehensibled) Timelye) Flexiblef) 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.