4.3 Sales Forecasting

Sales Forecasting - Quantitative management technique used to predict a firm’s level of sales over a given time period. It helps to identify potential problems and growth opportunities, so that management can prepare and make informed decisions.

Sales Forecasting Techniques

Extrapolation - Identifying trends in past data and extending them to predict future sales, often by using a best-fit line that extends beyond the data.

Market Research - Identifying and forecasting the buying habits of consumers, such as an increase in environmental awareness or abstaining from the use of plastic products.

Time series analysis - Attempting to predict sales levels by identifying underlying trends from a sequence of actual sales figures recorded at regular intervals in the past. There are three main trends to look out for:

• Seasonal Variations - Periodic fluctuations according to seasonal changes in weather.
• Cyclical Variations - Recurrent fluctuations in sales linked to the economic cycle of booms and slumps.
• Random Variations - Unpredictable fluctuations in sales revenue caused by erratic and irregular factors that cannot be practically anticipated.

Moving Averages - The arithmetic mean of sales figures by dividing the sum of sales figures by the number of items in the data set over a given period of time. It is a more accurate method of identifying trends by smoothing out variations in the data set that are caused by seasonal, cyclical and random variations.

Moving averages ‘center’ the data points: for a 3-point average you take the data before and after, for a 4-point you take two before and two after and put the average in the middle of the center two data points.

Benefits

Improved working capital and cash flow - Sales forecasts help the business identify potential fluctuations that could have severe implications to its liquidity position. A clear idea to expected sales revenues will enable managers to improve their cash flow position by improving stock control to avoid over- or under-stocking, ensuring necessary staff are employed to deal with scale of operations, and ensure credit and debt problems are dealt with before potential problems arise.‍

Helps to secure external sources of finance - Accurate and realistic sales forecasting will inevitably help the business with other forecasting-related decisions such as budgets, human resource planning and marketing strategies. A comprehensive plan of how the business will operate during the forecasted booms and slumps in sales will give financiers, shareholders and potential investors confidence in the capabilities of the business; enabling the business to gain favourable interest rates for financial loans, and attract investment.

Limitations

Inaccuracy of predictions - Past trends are never indicative of the future, and as with all forecasting, there is an element of uncertainty because of random events outside the control of the business, such as an economic recession or health crisis. The preparations of the business, such as an influx of human resources or a financial loan to deal with a forecasted rise in sales, may forsake the business and be the cause of its problems if the rise in sales never occurs.