2.2.1 Sales Forecasts

Question 1

Forecasting

Answer 1

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

Question 2

Sales forecast

Answer 2

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

Question 3

Purpose of sales forecasts

Answer 3

• 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.

Question 4

How are sales forecasts derived?

Answer 4

1. Correlation.
2. Past sales data (extrapolation)

Question 5

Factors affecting sales forecasts?

Answer 5

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.

Question 6

Challenges with sales forecasting

Answer 6

• 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.

Question 7

Correlation

Answer 7

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

Question 8

Positive correlation

Answer 8

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

Question 9

Negative correlation

Answer 9

As one variable increases the other decreases. Inverse relationship.

Question 10

No correlation

Answer 10

When there is no apparent link between the variables.

Question 11

Advantages of using correlation to forecast sales

Answer 11

• 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.

Question 12

Disadvantages of using correlation to forecast sales

Answer 12

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

Question 13

Extrapolation

Answer 13

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

Question 14

Advantages of using extrapolation to forecast sales

Answer 14

• 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.

Question 15

Disadvantages of using extrapolation to forecast sales

Answer 15

• 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.

Question 16

Moving averages

Answer 16

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.

Question 17

Variation

Answer 17

Sales in a specific time period – The moving average sales

Question 18

Advantages of moving averages

Answer 18

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

Question 19

Disadvantages of moving averages

Answer 19

• 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