2.2.1 Sales Forecasts Flashcards
Forecasting
A business process, assessing the probable outcome using assumptions about the future.
Sales forecast
A projection of future sales revenue based on previous sales and market data.
Purpose of sales forecasts
- Cash flow forecasts – estimate inflows each month.
- Human resources planning – how many staff to employ or make redundant.
- Production planning – how much stock/raw materials to buy.
- Used to estimate what sales targets to give to the sales force and what bonuses/commissions to pay.
- Forms the basis of the businesses overall aims and objectives which are viewed by investors to judge the success of the company.
How are sales forecasts derived?
- Correlation.
- Past sales data (extrapolation)
Factors affecting sales forecasts?
- Consumer trends.
- Economic variables – any measurement that helps to determine howe an economy functions: interest rates, consumer incomes, exchange rate for pound, tax on sugary drinks increasing.
- Actions of competitors.
Challenges with sales forecasting
- If the business is new.
- If the market is subject to significant disruption from technological change.
- If demand is highly sensitive to changes in price and income.
- If the product is a fashion item.
- If there are significant changes in market share.
- If the management have demonstrated poor sales forecasting ability in the past.
Correlation
A statistical technique used to establish the strength of a relationship between 2 variables.
Positive correlation
As one variable increases so does the other. Direct relationship.
Negative correlation
As one variable increases the other decreases. Inverse relationship.
No correlation
When there is no apparent link between the variables.
Advantages of using correlation to forecast sales
- Useful to predict sales and demand factors.
- Can see if there is a link that can be influenced for the benefit of the business.
- Simple technique and useful for tactical thinking.
Disadvantages of using correlation to forecast sales
- Coincidental links.
- Shows a link but hard to distinguish between cause and effect.
- Need to find a casual link by looking at other factors.
Extrapolation
A method used by businesses to predict future levels such as sales, through analysing trends in past data.
Advantages of using extrapolation to forecast sales
- Can help firms look ahead and plan into the future.
- Can prepare for times of the year when busy and adapt marketing strategies.
- Can identify particular segments of growth/decline.
Disadvantages of using extrapolation to forecast sales
- The past is not always the same as the future.
- Unanticipated external and seasonal factors can change forecasts and render useless.
- Some new random factors cannot be predicted.
- Not statistically valid.
- Ignores qualitative factors (changes in tastes and fashions)
- Unreliable if there are significant fluctuations in historical data.