Sales Forecast for Riordan Manufacturing 2006–2007

Introduction and Growth Objectives

Riordan Manufacturing is pursuing a growth strategy with a stated target of increasing sales by $50 million by the end of 2007. According to the annual invoices issued for 2005, the firm already has annual sales of $50.8 million, meaning this target would effectively double demand over a period of two years. The sales increase will be achieved through expanding business with existing customers — expected to account for 60% of the increase — as well as attracting new customers. To put the plan into action, it is necessary not only to develop underlying strategies that promote growth, such as increased incentives for the sales force, but also to develop a comprehensive sales forecasting plan.

When forecasting sales, different methods may be utilized, some more scientific than others. One approach is to make educated guesses, looking at past performance and assessing the influences and sales levels likely to occur. This is an ad hoc approach and is generally considered likely to be inaccurate, even when based on experience and knowledge (Armstrong, 1985).

Overview of Sales Forecasting Methods

Forecasting sales from existing trends and patterns is more commonly used, as it allows for different variations to be considered, such as changes in seasonal demand. Several approaches may be applied in this vein: assessment of the demand to be created through strategic changes may be conducted using a bottom-up approach (Koehler et al., 2003). The use of computer models and simulation may also be beneficial, allowing for the incorporation of the various factors that influence demand (Koehler et al., 2003). Modeling may further be used to assess the best way to meet specific targets.

Because a firm target already exists for the end of 2007, the forecasting here takes a top-down approach: beginning with the sales figures required and using subsequent modeling to assess the different factors and how they may be managed to achieve those goals.

The most appropriate approach for Riordan Manufacturing is to use existing sales data and project the increases needed to meet the stated targets. Because the increase is expected to take place over two years, and because the plan includes gaining new customers, it is likely that growth in the second year will be greater than in the first, as the strategy gains momentum and new customer relationships are established. The forecast employs a simple quantitative approach: using existing sales levels and projecting an increase of 40% in the first year, followed by a further increase of 60% on the first-year sales figure to reach the desired target in the second year.

Chosen Forecasting Approach

Using data from the Excel spreadsheet detailing invoices for 2005, the monthly revenues are extrapolated and scaled to meet the new sales targets and forecasts.

The table below presents the monthly revenue figures for 2005 alongside the forecasted revenues for 2006 and 2007, calculated using the percentage increases described above.

Conclusion and Alternate Considerations

This approach assumes that there will be an immediate increase in January of 40% on the previous year. This is deemed to be potentially viable given the new strategies which will stimulate demand, such as the special offers and sales incentives for the sales representatives. An alternate approach may be a graduated increase, which would account for a slower ramp-up in the early months as new strategies take hold and new customer accounts are established.