Business Paper 2 - Sales Forecasting (203)

Sales Forecasting

predicting future sales revenue, based on e.g. historical sales data, analysis of market surveys and trends

• estimating what is likely to happen in order to position the business to take advantage of opportunities is wise.

However…

• the future can’t be predicted accurately because external factors can affect its reliability such as…

• economic factors - such as unemployment, inflation, interest rates, exchange rates, economic growth - a change in any of these economic variables could reduce the accuracy of the sales forecast

• consumer factors - consumers’ tastes and fashions are constantly changing and businesses try to anticipate these changes through market research - however, consumers can be unpredictable and their preferences can change quickly

• competition factors – business cannot control the actions of their competitors - they will have plans for the future and any significant action by competitors could reduce to accuracy of sales forecasting

Quantitative Data (based on data - objective):

• time-series analysis by calculating the three-point moving average

Qualitative Data (use opinions - subjective):

• delphi technique

• brainstorming

• intution

Three-Point Moving Average

• evens out any fluctuation in data

• formula: previous month + current month + next month / 3

Scatter Graph

when taking about the graph, state if it is positive, negative or non-existent (no relationship between the two variables) correlation

Extrapolation

identifying the underlying trend in past data and projecting this trend forwards - extrapolation predicts future trends based on what has happened in the past

dashed line at the end of line of best fit

Correlation

correlation measures the relationship between two variables e.g. whether there is a link between a business’s advertising expenditure and the amount of sales it achieves.

when taking about the graph, state if it is positive, negative or non-existent (no relationship between the two variables) correlation

Time-Series Analysis (Advantages + Disadvantages)

statistical methods to analyse and forecast sales e.g. calculation of a 3 point moving average

Advantages:

• useful for being able to plan production and other business activity as a prediction of sales means the business can make sure it has the right amount of resources in place to meet demand and can plan ahead if it needs to expand

• based on actual trends and data so should be more accurate than just opinion

Disadvantages:

• historical data is not always a good indication of what might happen in the future, it assumes that past trends will continue

• doesn’t take into account other knowledge of and information of future trends e.g. changes in competition, technology, consumer tastes

Intuition (Advantages + Disadvantages)

• intuition is following an instinct or ‘gut feeling’

• it is difficult to predict the future if products are new to the market as there may be very little historical data available or if the market a business operates in is fast changing/unpredictable

Advantages:

• the use of intuition is cheap, and fast

• there is no need for data gathering, market testing etc.

Disadvantages:

• gut feeling and experience should not be the only guide. Even if experienced managers ‘feel it in their bones’, they could be wrong

• there are many examples of experienced entrepreneurs and business managers who have lost a lot of money due to their intuitive decision making

Brainstorming

• the basis of the brainstorm is ‘The Problem Statement’, which is the focus of discussion. Examples of problem statements might be ‘How can we improve the product to increase sales?’, ‘What actions are competitors taking in order to gain market share?’ or ‘What will be different about our market in five years’ time?

• during a brainstorm all ideas are welcome and there are no wrong answers as no judgements should be made of ideas. The brainstorm will work best if members are creative in their contributions and attempt to contribute a high quantity of ideas is a short amount of time.

• brainstorming is most effective with groups of 6-12 people and works best with a varied group i.e. within a business a brainstorming session should include participants from various departments from across the organisation and with different backgrounds (qualifications, experience etc.)

• however, it requires commitment from employees, therefore its effectiveness depends on how interested or motivated the employees in the brainstorming group are

Delphi Method (Advantages + Disadvantages)

the delphi method is a sales forecasting technique where multiple rounds of questionnaires are sent to a panel of experts (who do not know each other’s identity to remove bias) who work towards a common opinion about future sales

Advantages:

• participants have time to think through their ideas leading to a better quality of response

• creates a record of the expert group’s responses and ideas which can be used when needed - flexible to a variety of situations and problems and could be useful if there is a complex problem to solve

Disadvantages:

• the method will more than likely require a substantial period of time to complete as the process is time consuming to coordinate and manage

• it assumes that experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts

• monetary payments to the experts may lead to bias in the results of the study

Evaluate the advantages and disadvantages of using qualitative forecasting

Advantages:

• managers/experts use their experience and expertise to make predictions that historical data may not be able to take into account e.g. knowledge of customer trends

• useful when there is no historical data

• useful where the market is dynamic and fast changing e.g. in technology

Disadvantages:

• it ignores quantitative data that may be an accurate basis for future sales trends

• bias can exist in the personal opinions of managers/experts e.g. being over optimistic about a new product/sales

• the predictions made can turn out to be inaccurate and uncertain it is not using previous data as a basis