State why sales forecasts are important and Identify the sales forecasting methods outlined in the text.
What will be an ideal response?
Sales forecasting is important because they will feed directly into your financial projections. Sales determine your profitability and, ultimately, whether you will stay in business or not. Sales projections are also the basis for estimating how much money you will generate in the future. If your forecast is off, your firm could run out of money earlier than expected. So sales forecasts are vitally important.
Existing companies base their sales forecasts on historical sales, but if you are a new company, you can't do that. New companies can use sales forecasting from a fixed inventory. Estimate the time it will take you to sell your inventory based on the length of time it took others to sell a single similar item and multiply by the number of items you have in inventory.
If you have a product and service tied together, such as laying sod for new lawns, you can estimate the total market by looking at projected new homes being built in your area. Calculate what percentage of that market you can get and multiply that by the total market.
Other products are not tied as neatly to others. If you are opening a restaurant, you need to find the number of potential customers within you market that fit within your seating capacity. You also need to consider your hit rate, or how many prospects you need to approach in order to make one sale. Next is estimate the average amount of sales per customer.
Prospective Customers × Hit Rate × Sale Amount = Sales Forecast
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