Sales forecasting

Learning Objectives
Discuss on sales forecasting
Do you think it is important?
 Key Points (KP)
KP CONTENT

KP Purpose of sales forecasts

KP Difficulties of estimation

KP Factors affecting sales forecasts

Purpose of sales forecasts
• Imagine a business that did not carry out
any sales forecasting.
 How much stock would it buy and hold?
 What would its staffing levels be?
 How would it know if it had enough funding?
Without some predictions of sales, these
questions are impossible to answer.
Sales forecast – projection of future sales
revenue, often based on previous sales
data.
 Continuation...
• Forecasting is a business process,
assessing the probable outcome using
assumptions about the future.
• The accuracy of forecasts will depend on the
reliability of the data.
• What might a business like to predict with
accuracy? Examples include:
future sales of products
the effect of promotion on sales
possible changes in the size of the market in
the future
Does sales fluctuate?
 Continuation....
• Time series
analysis: A variety of
techniques can be
used to predict future
trends. One of the
most popular is time
series analysis.
• This involves
predicting future
levels from past data.
 Continuation...
• Time series analysis does not try to explain
data, only to describe what is happening to
it or predict what will happen to it.
• There are likely to be four components that
a business wants to identify in time series
data.
1. The trend.This shows the pattern that is
indicated from the figures.
 Continuation...
2. Seasonal fluctuations. They are very
important to certain businesses, such as
ice-cream producers or greeting card
manufacturers, where there may be large
sales at some times but not at others.
3. Cyclical fluctuations. These can be the
result of the recession-boom recession of
the trade cycle in the economy.
 Continuation....
4. Random fluctuations. At times there will
be ‘freak’ figures that stand out from any
trend that is taking place.
The benefits of sales forecasting
• inform cash-flow forecasts and give the
business a clear idea of what cash inflows
will be, so that finances can be managed
• allow the business to plan orders of
supplies and components.
• enable the business to ensure it has the
correct staffing levels for the projected
sales.
• enable the business to ensure that it has
the capacity to meet the projected orders.
 Factors affecting sales
forecasting
• Three crucial factors are consumer trends,
economic variables and actions of
competitors.
1 Consumer trends are the habits and
behaviours of consumers around the
products they buy and how they use them.
2 Seasonal variations. Some products are
seasonal in that they are purchased in
smaller or greater quantities at different
times of the year.
Table on Seasonal Variations

Time series data is used by businesses to identify seasonal variations.

For example, gas companies know that in the winter months they need to have
available quantities of gas to cope with her levels of demand from domestic and
business consumers.
 Continuation...
• Fashion. Consumer tastes and
preferences change and can be highly
unpredictable.
• Long-term trends. Whereas fashions can
change in the short term, and with little
notice, other changes to consumer
behaviour are more long term.
Example
Example
 Continuation...
2 Economic variables are measurements of
different aspects of an economy that give
an indication of how that economy is
performing. Important economic variables
are as follows:
Economic growth.
Interest rates.
Inflation
Unemployment
Exchange rate
Example on Economic Variables
 Continuation...
3 Actions of competitors. The actions of
competitors can have a real impact on a
business in many ways, from pricing to
promotion.
Sales forecasting is another area that can
be affected by the actions of competitors.
Where competitors use a strategy to
capture market share from a rival, sales
forecasts may need to be adjusted
downwards.
 Continuation...
• Any significant action
by a competitor will
affect the reliability of
time series data, such
as past sales.
Effectively, the
conditions within the
market have been
changed.
 The difficulties of sales
forecasting
• Predicting the future is not easy. This
uncertainty applies in all spheres of life.
Volatile consumer tastes and preferences:
We have seen how a business can use past
sales data to identify future sales. This is
called extrapolation. This is often a good
starting point and a reasonable basis on
which to base forecasts. However,
extrapolation is not a perfect method to base
future.
 Continuation...
Range of data: There is a lot of data
available to consumers, business and
government. This extensive range of data
can be difficult enough for a large
multinational business to make sense of, let
alone a small business.
Subjective expert opinion: However
statistical and quantitative time series data
might be, the fi nal decisions around sales
forecasts are often left to business experts,
such as sales analysts. These opinions are
necessarily subjective and can be wrong.
Forecasting is it challenging?