Sales Forecasting 2.2.1

Sales forecast - is an estimation of future sales that may be based on previous sales figures, sales volumes, trends, market surveys and trends or managerial estimates.

The purpose of this for the following categories are:

• Finance

1. Inform cash-flow forecasts i.e. how much money can the business expect to flow in from sales.(sales will directly affect cash inflow and so any change in future sales will alter the cash flow and so any change in future sales will alter the cash flow forecast and the level and availability of working capital)
2. Predict sales volume and sales revenue
3. Assess ability to break-even
4. Help set budgets (if sales are forecasted to increase, the business will need to increase departmental budgets for production and distribution)
5. Profit and Loss forecast (future sales will have a direct bearing on this)

• People

Plan workforce needs for:

1. Sales team
2. Seasonal staff in stores or distribution
3. Peak times
4. Operatives to ensure supply meets demand (the business may need more of fewer staff depending on the forecast)

• Marketing

1. Identify when promotional activity is needed e.g. before a potential peak or to avoid a dip
2. Plan distribution

• Resource management

1. Required levels of output (may need to be increased or slowed down to match the forecast)
2. Stock management (again, may need to be increased or decreased)
3. Can suppliers match demand

Sales forecasts are also useful from a historical POV; if the actual figure is different from the forecast figure the business can gain useful information. The difference between the two figures is called a VARIANCE and can be positive and negative. If a negative variance i.e. sales fell short of the forecast, managers will want to know what went wrong and take remedial action.

Factors affecting sales forecasts

 

1) CONSUMER TRENDS

 

 

Tastes and fashions come and go; just because something is popular one year does not mean it will continue to be so. Conversely, a sudden rise in popularity as the product becomes fashionable, can increase sales dramatically e.g. Burberry sells well in the far east. Businesses typically try to follow the experts such as London fashion week as an indicator of short term fashion trends. However, it is really difficult to predict the next trend.

 

The size and structure of the market may change over time e.g. the recent increase in the UK population will increase demand for some products. The UK also has an ageing population with high net migration which could affect demographics for businesses

 

Our shopping habits are beginning to change as well, we tend to shop more online than ever before; how will this affect who buys what, where and when?

 

2) ECONOMIC VARIABLES

 

 

Changes in GDP growth rates can affect consumer confidence and spending power which will affect sales, e.g. 2009-12 recession had a negative impact on people's willingness to spend and reduced the sales of many products and services.

 

If interest rates are low, this encourages consumers to spend as the reward for saving is low.

 

The amount of people employed in an economy, directly influences spending power, those in employment will have an income to purchase goods and service with.

 

Inflation, exchange rate variations and changes in interest rates can all affect prices and sales.

 

Changes in tax rates or legislation can affect sales; e.g. changes in VAT or the setting of new safety standards for the car industry which increases the price of cars.

 

If consumers are confident in the future of the economy, they are more likely to spend, however, if the economy is in decline they are more cautious. If the economy is recovering, then consumer confidence will be higher and employment rising which will impact on sales.

 

3) ACTIONS OF COMPETITORS

 

The launch of new or improved product or a fresh promotional campaign by a rival can affect sales e.g. the development of the Android operating system has affected Apple's sales forecast. This will impact on market share and therefore sales.





 

Changes in price and promotion could affect the sales forecast. Competitors lowering prices or increases promotional activities could negatively affect the businesses sales forecast.

 

Competitors could be better at responding to consumer trends and have greater flexibility and speed of response to changes in consumer wants.

 

4) NATURAL CHANGES

 

The weather can have a big impact on sales e.g. recent wet summers have severely damaged tourism in the Lake District.

 

5) CHANGES IN COSTS

 

The costs of raw materials can be volatile and affect prices and sales e.g. a rise in the price of cotton could increase the cost of cotton clothing and these increases may be passes on as higher prices.

 

 

 

DIFFICULTIES OF SALES FORECASTING

 

• Sales forecasts are based on past sales data with allowances made for known recent market changes. But like all forecasts they can be inaccurate. Markets can be fickle.
• The further ahead the forecasts are, the more likely they are to be inaccurate.
• Inaccurate forecasts can create real difficulties for the business
• Most of the factors mentioned above are beyond the control of the business
• An unexpected fall in sales revenue may lead to reduced budgets; cash flow forecasts may have to be adjusted and more working capital/additional finance may be needed.

 

Actions of the business itself can affect sales forecasts. For example, a marketing campaign might be more (or less) effective than planned. Still, sales forecasts provide useful guidance that will influence future planning.