Do you want to determine if your sales forecasting process is direct or indirect? If YES, here are proven methods you can use in 2023. Forecasting basically means estimating the quantity, type and quality of works to be carried out in the future e.g. sales. For any manufacturing concern, it is very necessary to assess the market trends sufficiently in advance to ensure that you will get market for your products.
This is a commitment on the part of sales department and the future planning of the entire business or company depends solely on this forecast.
To be able to get ahead in the market, the management of a firm is required to prepare its forecast of the share of the market that it can hope to capture over the period of the forecasting.
In other words, sales forecast is an estimate of the sales potential of the firm in future. Note that all of a manufacturing company’s plans are usually based on their sales forecasts.
This forecast helps the management in determining how much revenue it can expect to realize, how much to manufacture, and what shall be the requirement of men, machine and money.
Thus, having all these in mind, we can now define sales forecasting as the method by which you can estimate the type, quantity and quality of future sales that would be made in a company.
Now, the main aim of the sales department is to make decisions based on this forecast, and these forecasts also help in planning future development of the business. The sales forecast also forms a basis for production targets when it comes to manufacturing concerns.
Sales forecasts on their own are common and essential tools used for business planning, marketing, and general management decision making. A sales forecast is a projection of the expected customer demand for products or services at a specific company, for a specific time horizon, and with certain underlying assumptions.
A special term that usually crops up when studying sales and market forecasts is the word “potential.” This refers to the highest possible level that the purchase of a product can be made, whether at the company level or at the industry or market level.
When it comes to reality, you will find out that full potential is almost never reached, so actual sales are typically somewhat less than potential. Hence, forecasts of potential must be distinguished from forecasts that attempt to predict sales realized.
Sales forecasting is also an attempt to predict what share of the market a particular company expects to have. For very small companies that serve only a fraction of the total market, the company forecast may not even explicitly consider the market forecast or share, although implicitly, of course, the company’s sales are subsumed under the total market size. In the other extreme, a monopoly’s sales forecast is essentially the same as the market forecast.
Different methods have been adopted to forecast sales on the basis of definite facts and figures. Forecasting cannot be done on the basis of any guess work but on the basis of statistical data made available for the purpose. To arrive at accurate conclusions, different methods of sales forecasting are adopted.
- Direct Sales Forecasting
When it comes to this method, different departmental heads and their subordinates are meant to collect information on different aspects of production, sales, finance, etc. This information is later complied together and becomes data for the company as a whole. Every department makes its own forecast. These forecasts are later brought together as aggregated data for the company.
2. Indirect Sales Forecasting
Indirect sales forecasting is where the estimates of industry or trade as a whole are taken into account when it comes to making a decision on production and sales. No different departments or subordinates are expected to take part in the compilation of data or in the preparation of the forecasts.
An individual company is taken as a part of that industry, and the share of the total production that will fall to its log is determined by the overall data obtained.
The constituent units will later get their share from the main company. From the analysis, you will find out that the estimation was made indirectly without any one getting a free hand in the compilation of the data. In this case, the responsibility for successful forecasting rests with the top executives.
What Determines Whether the Sales Forecasting Process is Direct or Indirect?
Table of Content
Method of Approach
During sales forecasting, forecasters can first consider the broader market and then winnow it down to the company level, this is known as the indirect approach. When they only work with company data, it is called the direct approach.
This goes to show that the method the company uses in carrying out its one determinant for if its a direct or indirect sales forecasting.
2. Method of Analysis
Indirect sales forecast obviously lends itself more to causal analysis while the direct sales forecast leans more on noncausal. So, in theory direct and indirect approaches can be used in both causal and noncausal models.
3. Method of Application
Yet another way to determine whether a sales forecast method is direct or indirect is the method in which it is carried out, or the method in which it is applied. This is because it can be a revealing exercise to go through the indirect approach, since it requires that the forecaster considers the entire market potential of the product.
Through this process the forecaster—or a recipient of the forecast—may discover unmet needs or other indications that the product’s sales are performing well or performing below potential.
For many sales forecasters, the direct approach is most practical. This is because it focuses directly on the company and what affects its sales internally. So, if a company wants a more practical result, they have to go with direct forecasting.
Elements of a Good Sales Forecasting
The following four elements must be present when a company is thinking of adopting a sales forecasting method, regardless of whether they want to apply the direct or indirect sales forecasting method.
For a sales forecasting method to be acceptable, it need to be accurate in its predictions. The previous method must be checked for want of accuracy by observing that the predictions made in past are accurate or not. If any errors were observed, they need to be corrected in the recent one.
A sales forecasting method may be accurate, but if it is complex, it would be very difficult for employees to understand. So, whatever method you choose, note that it must be simple and easily understandable. It should satisfy top management and as well as the subordinates.
If a sales forecasting method is costing a company loads of money, then know that the method is impractical. For such an undertaking, cost is a main factor so the method adopted should consider the minimum cost that can be used to achieve the aim.
The technique must be able to produce meaningful results quickly. The technique which takes much time to produce useful information is of no use. I mean, if a company is in crisis, it does not need a solution that will linger on forever.
Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Therefore, the sales forecast indicates as to how much of a particular product is likely to be sold in a specified future period in a specified market at a specified price.
Accurate sales forecasting is essential for a business to enable it to produce the required quantity at the right time. Further, it makes the arrangement in advance for raw materials, equipment, labour etc. Some firms manufacture their products on order basis, but in general, most firms produce their material in advance to meet future demand.