Theme 3.3.1 Sales Forecasting

Question 1

What is sales forecasting?

Answer 1

The process of estimating future sales

Question 2

Reasons why sales forecasting is important to a business

Answer 2

The sales forecast forms the basis for most other parts of business planning:
HR plan: how many people we need linked with expected output
Production/ capacity plans
Cash flow forecasts
Profit forecasts and budgets
Part of regular competitor analysis and helps to focus market research
Stock mamangement

Question 3

What is meant by a moving average?

Answer 3

Collection of averages which “smooth” the fluctuations in data to take out extremes of the data over a period of time

Question 4

Why is calculating moving averages useful?

Answer 4

It makes volatile/ seasonal data easier to analyse in terms of their trend

Question 5

Volatile definition

Answer 5

Liable to change rapidly and unpredictably

Question 6

What is meant by extrapolation?

Answer 6

This is a method used by businesses to predict future levels such as sales, through analysing trends in past data

Question 7

What issues might there be with extrapolation?

Answer 7

• 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 tastes and fashions)

Question 8

What is meant by correlation?

Answer 8

• correlation is another method of sales forecasting

- it looks at the strength of a relationship between two variables

Question 9

How can correlation be used in sales forecasting?

Answer 9

• it can be used in the form of a scatter diagram
• on the Y axis could be “sales” and on the X axis could be time (present and future) with the trend and extrapolated trend presented on the scatter graph

Question 10

Drawbacks of using quantitative forecasting techniques such as extrapolation and correlation?

Answer 10

Extrapolations:
- unreliable if there are significant fluctuations in historical data
- assumes past trend will continue into the future - unlikely in many competitive business environments
Correlations:
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Question 11

What is the name of the forecasting technique that predicts the future by assuming that past trends will continue?

Answer 11

Extrapolation

Question 12

Explain how a correlation between the hours worked by sales staff and total sales volume will help predict next month’s sales

Answer 12

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Question 13

What is meant by the payback method of investment appraisal?

Answer 13

Investment appraisal: a series of techniques designed to assist businesses in judging the desirability of investing in particular projects.
This could include decisions on: introducing new products, expansion, new technology, etc.
Payback: the length of time that it takes for an investment to pay for itself from the net returns provided by that particular investment

Question 14

What is the formula to use if the payback period happens mid-way through a year?

Answer 14

no. of full years + what you need/ what you get x 12

Question 15

Why might it be good to use another method of investment appraisal alongside payback in order to decide on an investment project?

Answer 15

Payback ignores the overall return on a project e.g. may have a ten year payback but could have a higher return rate over that long time period; therefore average rate of return could be a better method

Question 16

Strengths of the payback method

Answer 16

• easy to calculate
• takes into account the cost of investment
• focuses on short term cash flow

Question 17

Weaknesses of the payback method

Answer 17

• ignores the overall return on a project e.g. may have a ten year payback but could have a higher return rate over that long time period; therefore average rate of return could be a better method
• ignores the time-value of money i.e. £180,000 in future is worth less than £180,000 in four years e.g. putting it into a bank account-> interest rate-> more money
• encourages a short-term approach