2.2.1 Sales Forecasts Flashcards

1
Q

Forecasting

A

A business process, assessing the probable outcome using assumptions about the future.

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2
Q

Sales forecast

A

A projection of future sales revenue based on previous sales and market data.

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3
Q

Purpose of sales forecasts

A
  • 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.
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4
Q

How are sales forecasts derived?

A
  1. Correlation.
  2. Past sales data (extrapolation)
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5
Q

Factors affecting sales forecasts?

A
  1. Consumer trends.
  2. 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.
  3. Actions of competitors.
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6
Q

Challenges with sales forecasting

A
  • 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.
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7
Q

Correlation

A

A statistical technique used to establish the strength of a relationship between 2 variables.

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8
Q

Positive correlation

A

As one variable increases so does the other. Direct relationship.

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9
Q

Negative correlation

A

As one variable increases the other decreases. Inverse relationship.

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10
Q

No correlation

A

When there is no apparent link between the variables.

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11
Q

Advantages of using correlation to forecast sales

A
  • 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.
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12
Q

Disadvantages of using correlation to forecast sales

A
  • Coincidental links.
  • Shows a link but hard to distinguish between cause and effect.
  • Need to find a casual link by looking at other factors.
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13
Q

Extrapolation

A

A method used by businesses to predict future levels such as sales, through analysing trends in past data.

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14
Q

Advantages of using extrapolation to forecast sales

A
  • 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.
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15
Q

Disadvantages of using extrapolation to forecast sales

A
  • 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.
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16
Q

Moving averages

A

This looks at several periods of time and averages out the data to help iron out all the peaks and troughs in demand and gives a more accurate figure of whether sales have risen or fallen in a market over a period of time.

17
Q

Variation

A

Sales in a specific time period – The moving average sales

18
Q

Advantages of moving averages

A
  • Easier to analyse smoother trends.
  • Accounts for variation in data.
  • More statistically valid.
19
Q

Disadvantages of moving averages

A
  • Erratic values may be useful to know.
  • Reduced accuracy as original data is distorted and ironed out.
  • Most useful only in stable periods.
  • Still based on past information