3.3 - Decision-making Techniques Flashcards
Quantitative sales forecasting
Provides an estimation of future sales figures using past data and considering predictable external factors.
3 methods of quantitative sales forecasting
Moving averages, extrapolation, correlation.
Moving averages
Smooths raw data and allows analysts to spot patterns, even when sales are subject to seasonal variations.
Normally a three-month moving average.
Calculated by adding together the sales figures for a specific number of periods (3, for 3 months).
Extrapolation
The prediction of future sales from past data.
Can often be done simply by finding the line of best fit.
Correlation
Where there is a link between two variables there is a correlation.
Correlations may be positive or negative.
Positive correlation
As one variable increases, so does the other variable.
Negative correlation
As one variable increases, the other decreases.
No correlation
Means there is no connection between the two variables.
Correlations
Limitations of quantitative sales forecasting
Useful when the future is expected to reflect what has happened in the past.
Especially effective in the short term.
in the longer term, uncertainties - especially the external environment - can make simple extrapolations of past data unreliable.
External factors that may influence the accuracy of sales forecast.
Seasonality - unusually hot summers or cold winters.
Competition - Entrance of new rivals or unexpected actions by competitors.
Publicity - positive/negative or unexpected promotions by a customer with a large social following.
Market changes - unexpected changes to consumer income or a swing in consumer preferences.
Changes to legislation - Unexpected changes to law or the tax structure.
Businesses can improve the accuracy of sales forecasting by
Conducting detailed market research, employing experts with excellent market knowledge, revising the sales forecasts frequently, forecasting for the short-to medium-term.
Investment appraisal
Involves comparing the expected future cash flows of an investment with the initial outlay for that investment.
What may a business want to analyse using investment appraisal
How soon the investment will recoup the initial outlay.
How profitable the investment will be.
What does investment appraisal require
Significant experience to interpret the data appropriately before the investment appraisal can take place.
3 methods to appraise the value of an investment
The simple payback period.
The average rate of return (ARR).
The net present value (of discounted cash flow)
Simple payback period
The amount of time it is expected an investment will take to pay for itself.
Initial outlay/net cash flow per period = years/months.
Benefit and drawback of the simple payback period
Benefit - can identify the point at which investment is paid back and making profit.
Drawback - no insight into future profitability of the business, may encourage short-termism approach.
Short-termism
The concentration on short-term projects for immediate profit, at the expense of long-term profitability or security.
Average rate of return (ARR)
Compares the profit per year an initial outlay.
(avg. annual return/initial outlay) x100
Expressed as a % (easy to compare)
Adv and Dis of ARR
Adv - considers all of the net cash flows generated by an investment over time, easy to compare as a percentage.
Dis - Ignores the timing of cash flows (when profit is made)
Net present value (NPV) of discounted cash flow
A financial metric used to evaluate the value of an investment or project.
How to calculate NPV
Net cash flow x discount factor %
Advantages of NPV
Range of scenarios considered, considers the opportunity cost of money.
disadvantages of NPV
Complicated to calculate, not accurate, considers financial cost not non-financial costs like environmental damage.
limitations of investment appraisal techniques
Relies upon forecasted future cash flows which may lack accuracy.
Due to - unexpected increases in costs, arrival of new competitors, changes in consumer tastes, uncertainties due to economic growth or recession.
recession
A downward trend in the business cycle characterised by a decline in production and employment.
Decision tree
A quantitative method of tracing the outcomes of a decision so that the most profitable decision can be identified.
Decision tree example
Expected monetary value calculation
(expected value £ of success x profitability) + (expected value of failure x probability)
Limitations of decision trees
Requires skill to construct and significant time to gather data, constructed using estimates, qualitative elements like HR impacts not considered, time lag between construction and implementation of decision affects reliability.
Critical path analysis
A project management tool that uses network analysis to play complex and time sensitive projects.
Critical path analysis shows
The order which activities must be completed, the earliest and latest that each project can start and finish, the critical path to finish as soon as possible.
three elements of the critical path analysis
Node - circle representing the point in time an activity is started or finished, split into 3, activity number, EST and LFT.
EST and LFT (critical path analysis)
EST - earliest start time.
LFT - latest finish time.
Critical path analysis example
The critical path
Float time
Exists when there is a difference between the EST and LFT.
When float time is identified managers may transfer resources to move critical activities, or allow extra time to complete tasks to improve quality or allow for creativity.
Float time example
limitations of using critical path analysis
Relies on estimates and forecasts, does not guarantee the success of the project.
