3.3.1 Quantitative Sales Forecasting

Question 1

What is a sales forecast?

Answer 1

• An important business planning tool
• Provide an estimation of future sales figures using past data & considering predictable external factors
• Can also be used to identify trends in product sales which can then be compared with the market as a whole
• Can prepare for external factors such as PESTLE

Question 2

What is meant by extrapolation?

Answer 2

• Extrapolation uses trends established from historical data to forecast the future

Moving averages are often used for extrapolation

Question 3

What are moving averages?

Answer 3

• A moving avergae takes a data series and ‘smoothes’ the fluctuations in data to show an average
• The aim is to take out the extremes of data from period to period

Question 4

How would you calculate moving averages?

Answer 4

1. Caluclate the moving total (add all the figures/ quatres up)
2. Calculate the centered average (divide by how many there are)

Question 5

What are the benefits and drawbacks of using extrapolation?

Answer 5

Benefits:
- A simple method of forecasting
- Not much data required
- Quick and cheap

Drawbacks:
- Unreliable if there are significant fluctuations in historical data
- Assumes past trend will continue into the future- unlikely in many competitive business environments
- Ignores qualitative factors e.g. changes in fashion

Question 6

How do businesses use scatter graphs?

Answer 6

• Scatter graphs allow businesses to compare two variables to see if there is any correlation
• e.g. sales volume & advertising

Question 7

What is correlation?

Answer 7

• Correlation looks at the strengths of the relationship between two variables

Question 8

What are the three types of correlation and how does a business use these?

Answer 8

Positive Correlation:
As one variable increases so does the other variable

Negative Correlation:
As one variable increases the other variable decreases

No Correlation:
Means there is no correlation between the two variables
Not possible to identify a line of best fit

Question 9

What are the key factors that affect sales forecasts?

Answer 9

• Consumer trends
• Economic variables
• Competitor actions

Question 10

What are the limitations of quantitative sales forecasting?

Answer 10

Seasonality:
- Weather related factors such as unusually hot summers or cold winters

Competition:
- The entrance of new rivals or unexpected actions by competitors

Publicity:
- Positive or negative publicity e.g. unexpected promotions by a customer with a large social media following

Market Changes:
- Unexpected changes to consumer income or a swing in customer preferences

Changes to legislation:
- Unexpected changes to law or the tax structure

Question 11

How can businesses improve the accuracy of sales forecasts?

Answer 11

• Conducting detailed market research
• Employing experts with excellent market knowlege
• Revising the sales forecasts frequently
• Forecasting for the short to medium term