Business 4.3

Question 1

What sales forecasting

Answer 1

quantitative technique used by businesses to predict the levels of sales that they may expect in future years.

Question 2

Uses of sales forecasting

Answer 2

• If the business is expected to grow, it would take further steps to meet extra demands.
• If the business is expected to decline, it may choose to reduce staff and production or capital reallocated or sold.
• To evaluate staff performance and set targets for employee.

Question 3

The three types of sales forecasting methods are:

Answer 3

• causal models
• time series analysis
• qualitative techniques

Question 4

What is extrapolation

Answer 4

involves identifying the underlying trend in past data and projecting this trend forwards.

Question 5

What is correlation

Answer 5

occurs when there are apparent links between variables, for example promotional spending and sales. Also, remember correlation is not causation.

Question 6

What is a casual model

Answer 6

quantitative representation of real-world business dynamics, showing the causal relationship between an independent (either internal or external factors) and dependent variable (sales).

Scatter diagram is constructed based on each variable. Then, line of best fit is used to understand the relationship between the two variables. Lastly, extrapolation can be used to make predictions.

Question 7

Advantages of sales forecasting

Answer 7

• Expected profit figures. Significant to investors and businesses that are putting together a business plan to raise funds.
• Effective future planning. If correct, business will be supported to plan for the future as it provides possible security of new equipment, staff and inventories.
• Increase budgets to increase sales. If there is a decline, companies can react by increasing marketing budgets, in hopes to increase sales.
• Better ability to decide. Either positive or negative forecasts allow businesses to make an appropriate decision. For example: withdrawing a product from the market, when the business is at decline, before it drains resources.
• Think in terms the benefit brought to each business function, too.

Question 8

Disadvantages of sales forecasting

Answer 8

• Lacking of data. New companies do not have own historical data to reference.
• Changing markets. Rapidly changing markets can lead to forecasts to be invalid.
• Flexibility. Forecasts are only guides, managers should remain flexible rather than following a rigid planned system.
• Use of different methods to predict. There are other methods companies should be mindful of such as market research results and product life cycle analysis.
• Potential manager personal bias when forecasting which misleads the data. Either being too optimistic or pessimistic.

Question 9

When they appear in examinations, sales forecasting questions often come in one of two formats. One type of question will ask you to analyse and/or graph data to make a sales forecast. You may need to graph data, draw a line of best fit and extrapolate. Another type of question may ask you to evaluate the uses and limitations of sales forecasting.