So, which of the three market potential forecasts approaches, which are market factor derivation, surveys, and test markets, do you find typically produces the most accurate results? I think test markets are the most accurate way of forecasting sales. Your biggest problem with them is that they cost a lot of money and they're really time-consuming. So, that's like the Cadillac. That's the gold standard of how the basis sales forecast because it's based on real market feedback. Real market interaction with you. The other approaches are maybe not as accurate but are faster or cheaper. So, of course, a manager is always managing their resources and the constraints against their resources, and in some cases, may ideally want to do some kind of test market type of thing, but can't. They have either not the time or the money and they need to look at others, and that's okay. What types of mathematics do you need in order to estimate sales forecasts using things like the moving average, exponential smoothing and regression? How much of a math background do you need? Well, that's a great question. So, I would say first of all mathematics may not be the best term, but I would say statistics is the field that we employ those kinds of tools, and the good news today is that there are lots of statistical programs that don't really require you to know a lot about how to do them or really have to actually perform the hard-core mathematics. You just have the data and it walks you through the steps that are necessary in order to predict it. So, an example of that would be like regression. Regression is trying to look at one set of variables or one set of data, but using that data to predict another type of data. So, a very simplified type of thing might be if you looked at something like snow shovels sales, and you looked in the predictor variable was the weather forecasts or how much snow fell on a particular area, and so, you might say here's how much snow fell each day and then here where the resultant snow shovel sales that occurred. Regression tries to see is there a relationship between those type of things. The calculations for doing regression can be pretty daunting. But today, you can easily get hold of statistical packages and you just load in your both sets of data and punch a button and you're able to get those results. So, and used to be that some of these statistical packages you still had to be really familiar with how to work those things. But today, they're much more user-friendly. What are some potential problems that might appear when you're defining your sales budget? Well, your biggest problem that you've got is that you want that budget to be accurate. So, sales budget is your forecast into the future as to what you think your sales revenues are going to be as well as your sales expenses. So, common sense would suggest though that predicting the future is a pretty tricky thing, but the life of a manager is a lot easier when your budgets are fairly close to what reality would be. I see there are two kinds of problems that you have to be aware of and the one is a desire to be conservative in your budgeting. So, you have a tendency to maybe not necessarily predict what you think might be the total upside of what sales are, but more like the sales that you think you can really achieve, and likewise with expenses may be really conservative as far as that because that picture paints a really rosy scenario for you. But it's not particularly useful as a manager because you game did a little bit to protect yourself in that process. So, the number 1 problem I think is being overly conservative. The second problem was sales budgets. Aren't so much the budgets per se, but recognizing that that's all they are. Your best guess as to what reality will be, and a really good manager recognizes that reality is never going to fall exactly to what your budget would be. You've got to expect that there is going to be some deviation from that. So, one of the things that I think is a useful tool when you're developing a sales budget is at the same time to come up with action plans off the shelf things that you might do when things may not go the way you want them to be. What are you going to do if maybe despite your best efforts, sales are nowhere close to what you thought they were going to be? They're way below what you wanted. I hope that doesn't happen, but if it does, do you have a plan in place that you can put into place to be able to capture what goes on with that? I find that a lot of sales managers tend to fall in love with that budget. Okay. But then when life has a funny way of not following that budget, just become completely unglued, and that's not smart either. So, just recognize budgets are what they are. They're your best guess as to what your roadmap towards the future is going to be. Although most budgets are prepared quarterly, are there any pros and cons of doing it that way versus semiannual or annual budgeting? I guess it depends a bit on your nature of your business and how stable the business is, and if the business is very very predictable, you can probably get by with semi-annual or an annual budget, and certainly the big advantage of that is that it just takes a lot less work. If you do any annually, that's one quarter the amount of effort you've got to put into it than if you were doing it on a quarterly basis. Unfortunately though, I think most businesses are operating in markets that are very turbulent and despite your best of guesses what you think is going to be in the future is unlikely to fall that way, and thank goodness that's the case because that means that at every three months, you have a chance to go back, reassess where you are and re-forecast where things want to go. I think that the other scenario that I have seen sometimes is that when you have a sales manager that's been in the job for a really long time and has just developed an incredible base of institutional knowledge and has really good instincts, good gut feel for what they think's going to happen or what she thinks is going to happen. In that case, maybe you're so good, you can get away with a once a year type of forecasting. But for us mere mortals, I think quarterly forecast is a much better more useful managerial tool. So, there are three approaches for developing a sales budget. We have historical percent of sales and objective and task. Would it be a good idea or a bad idea to try to combine these approaches when you're developing your budget? I know of some companies that actually will do their budgeting a couple of different ways and use that as a way of getting a sense as to how sensitive these different tools are. If you go through three different processes and you come out with pretty much the same budget, some managers take some comfort then in thinking then that budget must be a pretty solid thing when you start to see a consistency with each particular approach that's done. The downside of course is though you might have three different methods that you're going to use and you could have three wildly different budgets that could come out of those from that. The question that you didn't ask that sometimes I'm post with though is of all the different tools that you've got, what pros and cons or which one is better and all, I have tendency to feel that the objective and task method is the one that basically says what is your goal? What is it that you're looking to try to achieve? Then what's it going to take for you to be able to achieve that? I just think intuitively that makes a lot of sense, that really grounds the managers thinking in terms of what its overall mission and goals would be. The percentage of sales or percentage type method is very useful when you're doing like long-term projections, you can develop an Excel spreadsheet and put your formulas in, and it can populate that forever. But it assumes then that your markets and your economic conditions are relatively stable. Those methods are useless if suddenly another competitor comes into the marketplace, and everything that she did in terms of your sales forecasting and sales budgeting is probably going to have to be rethought because you have a new entrant in there. So, you need to recognize that all of the different tools have have their relative strengths and weaknesses. I think Objective and Task though is really rock solid.
