What is a Sales Forecast?. How to forecast by Trend Projection Method

We all understand that every business organization will try to find the future sales of their business for the upcoming periods. These sales forecast maybe for a short period or long period. These Sales Forecast is doing by using quantitative and qualitative techniques like executive opinion, Trend Projection Methods etc. Nowadays, in the light of emerging concepts like artificial intelligence (AI), machine learning, companies are using sophisticated computer applications to forecast their sales.

Sales forecasting is the method of estimating the future sales volume by investigating the recorded sales data available in the company and other external data and information. 

Sales forecasting is essential why because all the other business functions and budgeting directly depended on the sales forecast. It is the base for all other activities like production planning, strategic planning, HR and administration activities planning etc.

Before discussing the sales forecast by trend analysis, we need to analyse the steps in the process of sales forecasting and forecasting methods usually used in the business.

What are the steps in the Sales Projection ?

Many methods are available to forecast the sales of the product. But usually, the process to estimate the sales is almost the same.

1. Set the aim for the Sales Forecasting

It may confuse us that in sales forecasting, what will be our aim?

No need to be confused. It is needed to fix the exact objective of Sales forecasting. It may be with regards to demand or maybe the trend of the market so on.

2. Decide the period for which the forecasting is to be done

As business is concerned, the Sales Forecast maybe for next quarter or the next year or any other long periods. Business innovation plan may require long term sales forecast before the investment in innovation projects. 

We need to decide whether the forecast is for a short term period or long term period. This informations affect the selection of data and an apt method of forecasting etc.

3. Decide the most relaible method of forecasting

Depends on the industry, the period for which the forecast is making and many other factors may affect the selection of the method of the Sales Forecasting technique. It is important to select the reliable, economical and suitable method of projection. Select a method which gives the most reliable output.

4. Set the Data for the forecast

Most of the forecasting techniques used the past data, present situation and implications in the economy on the future sales and the factors which may affect the sales of the company in the short run and long run. 

The data may be retrieved from the company’s records as the company recorded the data for may years. If these kinds of primary data are not available, the company may go for the published data from magazines, business newspapers, or from experts.

The best-recommended process is the use of both the data sources like the available recorded data by the company and the reliable data published by external expert agencies.

5. The Forecast

Now we reached to the the initiation of a forecast.

Companies are using many different forms of sales projection methods. It includes qualitative and quantitative methods. By using each of them, we can estimate future sales figures. We can have a quick look at some of the techniques.

Different Methods of Sales Projection

1. User’s expectation method.

Under this method, the end-users or prospective users are contacted directly and surveying their wish to buy the product. Based on this data, the total projected sales of the organization estimated. 

Under this method, the estimates are most likely correct as we contacted the prospective customers only. Along with that, when we interact with the customers, we may have more ideas for more engaging products to develop. But accessing the prospective customers will be expensive except in those cases where the number of customers is less.

2.The combined opinion of the sales team

The company may have the sales staff, from salesman to Director-Sales, most of them are directly interacting with customers. Hence, the collective opinion of all these persons is collected and verified by other senior officials by considering the other factors which may affect the sales volume.

 

Here, the sales executive need to confirm the forecast of the sales for their allotted area. Area Manager needs to estimate the sales for the entire area by consolidating the sales executive’s forecast. The consolidated projection will go to higher levels of the organization for their opinion.

3. Experts opinion

We can see many professionals and experts in the concerned area. They may be researchers, a columnist in newspapers, or wholesalers. We can plan the sales of the company by considering the expert opinion of these experts.

4. Market Test Method

Under this method, the product is introducing to a small portion of the market. And the response received from this market is considered as a projection or forecast for the entire market. This method is most suitable when the company introduced a new product to the market. 

5. Then the trend projection method

In Trend Projection Method, we calculate the future trend of the past sales activity, which the company recorded over the specified period. These data need to adjust with the abnormal activities and events which affected the past sales volume and revenue of the company.  



The assumption behind the trend projection method is that if there is a trend or patters in the past sales of the company, the same patterns will remain in future also.

The recorded data of sales for a past period, technically known as time series is used to predict the future.

6. Moving Average Method

A Moving Average also is a statistical technique used to find the trend of the data set. In this method, the company uses historical data to predict future sales.

Steps to Use Trend Projection Method

You can follow the below mentioned steps to forecast the sales by Trend Projection Method

Step 1.

Retrieve the recoded past sales data for a certain period. It may be 5 years,6 years 7 year. We can assign a value to this number of years as “n”

Step 2.

Consider a year ( The year at the middle of the series) as the base year

Step 3.

Find the time deviation from this base year for all other years and record. These values are considered as “x”

Step 4.

Find the total of all these time Deviations ( ∑x ).

Step 5.

Find the square of Time Deviation separately for each period and total it  ( ∑X² ) 

Step 6.

Find out the sales for all these years. This figure, we can give a value “y”

Step 7.

Find the product of Sales(Y) and Time Deviation individually and sum up ( ∑XY ).

Step 8.

We need to find values for “a” ( denoted the average sales ) and “b” (Denoted the rate of growth).

Equation to find out “a” & “b” as follows.

a\quad =\quad \frac { \sum { Y } }{ n }

b\quad =\quad \frac { \sum { XY } }{ \sum _{ }^{ }{ { X }^{ 2 } } }

The last step is to apply the values in the below mentioned equation. 

Y=a+bX

Sales Forecasting with Trend Projection Method - Example

Trend ProjectionWe have the sales data of a company for the last seven years as follows. We can try to forecast the Sales for the next two years.

Solution

Here we find below mentioned values

The base year = 2015

n = 7  ( Number of Years)

\sum { Y } = 1337 ( Total Sales)

\sum _{ }^{ }{ { X }^{ 2 } } =\quad  28 ( Total of Squares of Deviation )

\sum { XY } =\quad 72

So, we need to find the values for “a” & “b”

a\quad =\quad \frac { \sum { Y } }{ n } \quad =\quad \frac { 1337 }{ 7 } =\quad 191 

b\quad =\quad \frac { \sum { XY } }{ \sum _{ }^{ }{ { X }^{ 2 } } } =\quad \frac { 72 }{ 28 } \quad =\quad 2.57

Now we can apply these values in Regression Equation 

Y = a + bX

Here, Y= The year for which the sales is projecting.

X= The Deviation from base year (Eg. 2015 – Y )

Y(2019) = 191 + 2.57 X 4 = 201.28

Y(2020) = 191 + 2.57 X 5 = 203. 85

Projected Sales through Trend Projection Method for 2019 is  201.28 Million &  2020 is 203.85 Million 

Conclusion

We discussed the steps, methods and Trend Projection method used to project future sales. But there are many other forecasting methods and sophisticated application available in the market. We can not say which system will be most suitable for the projection of sales of the company. Therefore, the Sales forecast method may possess qualities like accuracy, cost-efficient, easy to compute.

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