Sales Forecasting

Sales Forecasting

1. Introduction

   • Sales forecasting is the process of predicting what a firm’s future sales will be
   • it uses quantitative methods to estimate then future sales levels and trends over a specified period of time
   • it predicts the future, reduces uncertainty and helps in management of stock and cash flow, ensuring better planning for growth
   • businesses need sales forecasting information to assist them in making intelligent business decisions
   • but, making accurate prediction is a complex process and may be affected by numerous external factors

2. Time Series Analysis

   • quantitative sales forecasting method that predicts future sales levels from past sales data
   • relies on time series data, which is sales information that businesses have kept over a given period since it occurred
   • the businesses then rely on this past data in an attempt to predict the future
   • The trend
     • a visible pattern noted inputting the past sales data
     • may indicate the rise and fall of sales over a given period
   • Seasonal fluctuations
     • changes in demand because of the varying seasons in the year
     • Example: when a business experiences an increase in sales of clothing at the beginning of a new year but experiences a decline in sales in the middle of the year
   • Cyclical fluctuations
     • variations tied to the business cycle in an economy
     • sales could be on the rise during the growth phase but declining through a recession
     • Cyclical fluctuations can happen for more than a year
   • Random fluctuations
     • notable changes or fluctuations that stand out from a given trend
     • Example: there may be a sudden increase in the demand for ice-cream during a rare warn winter day
     • random fluctuations can occur at any time

3. Moving Averages

   • Introduction
     • useful for identifying an emphasising the direction of a trend
     • it is more accurate and complex method than simply predicting future sales form actual sales data
     • it can help because it helps smooth out any fluctuations form sales data
   • Calculating a three-year moving average
     • (refer to page 275 Oxford textbook)
   • Calculating a four-year moving average
     • (refer to page 275 Oxford textbook)
   • Extrapolation
     • (refer to page 275 Oxford textbook)
   • Calculating variations
     • (refer to page 275 Oxford textbook)

4. The benefits of sales forecasting

   • Better cash flow management
     • taking into consideration cyclical and seasonal variation factors
     • financial managers can better plan to improve the liquidity position of a business
   • Increase efficiency
     • sales forecasting assists the production department in knowing the number of goods to produce and in planning for the amount of stock required in the future
   • Better workforce planning
     • accurate sales forecasting can hep the human resources department in succession planning regarding the number of staff required in the future
   • Improved marketing planning
     • marketers will gain greater awareness of future trends and be able to adjust their marketing strategies
     • helps increase their market share

5. The limitations of sales forecasting

   • Sales forecasting is time-consuming
     • takes a long time to calculate because of its complex nature
   • Sales forecasting ignores qualitative external factors
     • a number of political, social and economic factors can influence the accuracy of sales forecast predictions
     • (political instability)
     • (change in consumer tastes and preferences)
     • (exchange rate fluctuations)