Sales Forecasting Flashcards
Why forecast sales?
A vital planning activity
The sales forecast forms the basis for most other common parts of business planning:
Human resource plan: how many people we need linked with expected output
Production / capacity plans
Cash flow forecasts
Profit forecasts and budgets
A very useful part of regular competitor analysis and helps to focus market research
What is extrapolation?
Extrapolation uses trends established from historical data to forecast the future
What are moving averages?
A moving average 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
Benefits of extrapolation?
Simple method of forecasting
Not much data required
Quick and cheap
Disadvantages of extrapolation?
Unreliable if there are significant fluctuations in historical data
Assumes past trends will continue into the future - unlikely in many competitive business environments
Ignores qualitative factors (e.g changes in tastes and fashion)
What is correlation?
Correlation looks at the strength of a relationship between two variables
What are independent variables?
The factor that causes the dependent variable to change
What are dependent variables?
The variable that is influenced by the independent variable
What are the three types of correlation?
- Positive
- Negative
- No Correlation
What is strong correlation?
Strong correlation means that there is little room between the data points and the line
If the data suggests strong correlation, then the relationship might be used to make marketing predictions
What is weak correlation?
Weak correlation means that the data points are spread quite wide and far away from the line of best fit
What are confidence intervals and levels?
A confidence interval gives the percentage probability that an estimated range of possible values in fact includes the actual value being estimated
What are the key factors affecting sales forecasts?
- Consumer trends
- Economic variables
- Competitor actions
What are the circumstances where sales forecasts are likely to be inaccurate?
Business is new – a startup (notoriously difficult to forecast sales)
Market subject to significant disruption from technological change
Demand is highly sensitive to changes in price and income (elasticity)
Product is a fashion item
Significant changes in market share (e.g. new market entrants)
Management have demonstrated poor sales forecasting ability in the past!
