The Sales forecast is typically the starting point of the financial forecasting exercise. Most of the financial variables are projected in relation to the estimated level of Sales. Hence, the accuracy of the financial forecast when talking about investment property for Sales depends critically on the accuracy of the Sales forecast.
Although the financial manager may participate in the process of developing the Sales forecast, the primary responsibility for it typically rests with the marketing department or the planning group. Sales forecasts may be prepared for varying planning horizons to serve different purposes. A Sales forecast for a period of 3-5 years, or for even longer durations, may be developed mainly to aid investment planning. A Sales forecast for a period of one year (and in some case two years) is the primary basis for the financial forecasting exercise. Sales forecasts for shorter durations (six months, three months, one month) may be prepared for facilitating working capital planning and cash budgeting.
A wide range of Sales forecasting techniques and methods are available. They may be divided into three broad categories: qualitative techniques, time series projection methods and casual models. Qualitative techniques rely essentially on the judgment of experts to translate qualitative information into quantitative estimates. Time series projection methods generate forecasts on the basis of an analysis of the past behavior of time series. Casual model techniques seek to develop forecasts based on cause-effect relationships expressed in explicit, quantitative manners.
Each technique has its advantages and limitations. Often, exclusive reliance on a single technique is somewhat dangerous, and practical wisdom suggests that at least two techniques, which seem to make sense in the specific circumstances of the firm, may be employed to hammer out the Sales forecast. While a system of master budgeting is required for comprehensive financial planning and control, a broad-brush kind of analysis suffices when the primary objective is to project the future financial performance, condition and requirements in relatively aggregative and approximate terms.