Forecasting Sales and Developing Budgets

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Chapter
12
Forecasting Sales and Developing Budgets
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Class Agenda

• Quiz
• Chapter 12 Forecasting Sales and Developing
  Budgets
• Hand back Mid-terms Feedback

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Importance of Sales Forecasting

• Basis for overall corporate and marketing plans
• Financial planning (working capital and plant
  utilization)
• Production scheduling
• Sales force planning

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Market potential is the total expected sales of a
given product or service for a firm in a specific
market over a stated period of time. a)
True b) False
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2. One of the three fundamental techniques for
estimating market and sales potentials for a
product is market-factor derivation. a)
True b) False
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• What market factor(s) would you use to estimate
• the market potentials for each of the following
• products?
• a.Tiger Shark Golf Clubs.
• Number of country clubs.
• B. Scotts Fertilizer
• Number of single-family residences
• c.Chrysler Automatic Swimming Pool Cleaner
• Number of swimming pools
• d. Mohawk Carpeting
• Square footage of new, housing construction
• e.Smiths Ski Goggles
• Number of skiers
• f. McGraw Hill economics text
• Enrollments in colleges and universities.

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7. Arvis is employed by a company that
manufactures lighted signs. As part of
developing a sales forecast for next year, Arvis
has estimated the maximum possible sales his firm
could reach under current conditions will be
730,000 units. This number is an example of
a(n)a) company sales potential.b) company
sales forecast.c) industry sales forecast.d)
industry sales potential.
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3. The primary advantage of surveys of buyer
intention is the cost. a) True b) False
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4. One of the most accurate methods of estimating
sales potential isa) test marketingb) surveys
of buyer intentionc) market-factor derivationd)
none of the above
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What are some of the pitfalls in conducting test
markets?

• The market is made aware of its special status
  thereby creating some favorable bias.
• Many outlets in the test area will carry a
  product when they know that it is being tested,
  whereas under normal circumstances they might not
  be so cooperative
• Test products may be given more favorable display
  space and attention than usual.
• Many firms do not employ the same promotional
  techniques in a test market that they would
  employ on a national basis.
• Many products require considerable time to "catch
  on" in order to be a success. Therefore the test
  market needs to be sufficient in length.

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Sales Forecasting Methods
SURVEY
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8. A land developer asked a panel of experts to
respond to a series of questionnaires about land
usage and land potential for an area just north
of a metropolitan area. Each new questionnaire
administered depended on the responses of the
previous questionnaire. The approach enabled the
panel members to have access to the information
contributed by other respondents and prevented
anyone from dominating the group. The land
developer was using correlation analysis. a)
True b) False
Delphi Technique
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Sales Forecasting Methods
MATHEMATICAL
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9. Management would like to use historical sales
data from the last five years to forecast next
years sales, but they are concerned that the
older data may not reflect the current situation
as well as more recent data. Which of the
following methods would be most appropriate for
their needs?a) exponential smoothingb)
regression analysisc) correlationd) trend
projections.
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When should the smoothing constant be large?
When should it be small?
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Fig. 12-6 Projection of Sales Trend by Least
Squares Method
35 30 25 20 15 10 5
2010 forecast 10-year base2010 forecast
4-year base
x
x

2000 2001 2002 2003 2004
2005 2006 2007 2008 2009
2010
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• 7. The following regression model was developed
  by a professor to help the owner of a restaurant
  predict sales.
• Sales 70.0 46.5X1 208.5X2
• where sales sales per month
• X1 advertising expenditure per month
• X2 value of coupon
• Forecast sales if the owner decides to spend 500
  on advertising and offers a coupon for 5 off one
  meal for parties of two or more in a month.
• If X1 500 and X2 5 then
• Sales 70.0 46.5(500) 208.5(5) 24,362.50
• Forecast sales if the owner decides to spend 400
  on advertising and offers a coupon for 10 off
  one meal for parties of two or more in a month.
• If X1 400 and X2 10 then
• Sales 70.0 46.5(400) 208.5(10) 20,755.0

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5. When the forecasting period is short (one year
or less), forecasting accuracy is likely to be
______________ when the forecasting period is
long.a) less than b) the same as c) greater
than d) all of the above
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6. As discussed in your text, the three general
categories of sales forecasting methods are
termeda) survey methods, mathematical methods
and predictive methods.b) survey methods,
mathematical methods and operational methods.c)
mathematical methods, operational methods and
educated guessing.d) none of the above
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Sales Forecasting Methods

• Other
• Must-do calculations
• Capacity-based calculations

OPERATIONAL
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• 9. A company's best-selling product line
  possesses a highly variable sales pattern
  according to company records. Which sales
  forecasting technique should be used to provide
  an accurate sales forecast for the product in the
  coming period?
• multiple forecasting techniques

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Guiding Principles for Forecasting

• Fit the method to the product/market
• Use more than one method
• Minimize the number of market factors
• Recognize the situation limits
• Use the minimum/maximum technique
• Understand math and statistics

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Sales executives are responsible for formulating
three basic budgets the sales budget, the
selling-expense budget and the sales department
administrative budget. a) True b) False
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Methods for Budgeting

• Percentage-of-Sales Method
• Objective-and-Task Method

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Fig 12-8 Flow of Information from Sales Budget
to Other Budgets
Sales budget
Sales department expense budgets (advertising,
selling costs, administration)
Production department budgets
Administrative expense budgets
Profit-and-loss budget
Cash budget
Revenues
Revenues
Expenses
Expenses
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11. If total expenses must be reduced by 10
percent, should an across-the-board cut or a
selective reduction be used? If selective, how
should the selection be made?

• The manager should never apply an
  across-the-board cut in order to reduce total
  expenditures.
• (will unduly hamper certain critical activities
  that should not be touched, and the manager will
  not penalize certain areas that should be cut
  back even further)
• A selective reduction should be practiced.
• It is accomplished by going down the list of
  activities now performed and determining which
  are reducible and which are not.
• The procedure should be to call in the
  administrator of each activity and have that
  person justify the request for funds. In this
  way, the manager can determine what activities
  could be eliminated and what would happen if they
  were.

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Interview Action Plans

• Due March 8th at 330 pm
• Follow Template on the Course Website
• Possible Interviewees
• Possible Topics
• Action Plan

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Mid-term

• Put to paper your full analysis.
• Integrate relevant course content.
• Try not to get hung up on one issue in the case.
• Make conclusions from your situational analysis.
• Ensure that your paper flows and that your paper
  is written well in terms of overall readability.

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Next Class

• We will go over the Mid-term Case Analysis
  (Johnson Drug Company)
• We will cover Case 12-1 (Andros Intercom)
• Read case, and answer questions before class
• See notes in Slides on Course Website,
  Regression Analysis in MS Excel
• Read articles on Course Website (Forecasting _at_
  Ocean Spray, Information Mkts)
• Interview Action Plans due by 330 pm, March 8th
• We will also go over Exponential Smoothing

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Regression Analysis in MS Excel

• In order to perform Statistical Analyses in MS
  Excel you have ensure you have the proper add-in.
  The following are the steps to add the Analysis
  ToolPak
• Tools, Add-ins, Check Analysis ToolPak, OK
• Enter Data into a MS Excel Spreadsheet

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Regression Analysis in MS Excel, Contd

• Tools, Data Analysis, Regression, OK
• Specify Input Y Range for Unit Sales
• Specify Input X Range for Advertising, Price, and
  Housing Starts
• The output will contain everything you need for
  the Case Analysis