4.3 Sales forecasting

Sales forecasting

Quantitative management technique used to predict a firm's level of sales over a given time period.

What do sale forecasts help firms do?

Identify problems + opportunities in advance

3 sales forecasting techniques

1. Market research

2. Extrapolation

3. Time series analysis

Market research as a sales forecasting technique

Identify + forecast consumers buying habits

Extrapolation- sales forecasting technique

Identifies firm’s sales trend using historical data + extending the trend to predict future sales

How is extrapolation shown graphically?

Line of best fit

• + extend

When will extrapolation work well?

Clear correlation betw 2 data sets

Time series analysis- sales forecasting technique

Attempts to predict sales levels by identifying the underlying trend from a sequence of actual sales figures

3 variations affecting time series analysis

1. Seasonal variations

2. Cyclical variations

3. Random variations

Seasonal variations

Periodic fluctuations in sales revenues during different times of the year

Random variations

Unpredictable fluctuations in sales revenues caused by erratic + irregular factors that can’t be reasonably anticipated

Cyclical variations

Recurrent fluctuations in sales revenues linked to the economic cycle of booms + slumps

The combination of sales forecasting methods a business will choose depends on?

1. Accuracy

2. Time

3. Cost

4. Stage in a products PLC

How does accuracy affect sales forecasts?

Need greater degree of certainty → use monthly data

• Eg to forecast ice cream sales (shows seasonal demand fluctuations)- won’t be seen w annual figure

How does time affect sales forecasts?

Easy to forecast sales for next day / week (not years)

When is extrapolation useful (accurate)?

Only if predictions apply to the near future

How does cost (availability + cost of data collection) affect sales forecasts?

• Lots of data at low / no cost → SF accurate

• No up to date data / expensive → SF inaccurate

How does the stage in a product’s PLC affect sales forecasts?

• R&D + launch → market research used, not time series analysis

  • More info available during growth + maturity of PLC

Pros of sales forecasting

1. Improved working capital + cash flow

2. Improved stock control

3. Improved productive efficiency

4. Helps secure external SoF

5. Improved budgeting

Helps business operate more efficently + profitably bc managers have better control + informed expectations of the near future

Cons of sales forecasting

1. Limited info

2. Inaccurate predictions

3. Garbage in, garbage out (GIGO)

4. External influences

In terms of over / underpredicting sales forecasts, what does it mean if most new products fail?

Businesses overestimate their ssales