Sales Forecasting (Edexcel A Level Business)
Revision Note
The Purpose of Sales Forecasts
Sales forecasts predict future revenues based on past sales figures
They commonly focus on what will happen in the future to:
The volume and value of sales
The size of the market
Sales as a result of promotional activity
Sales as a result of cyclical factors
Sales forecasts are an important tool to support planning and can improve the validity of cash flow forecasts
Businesses use sales forecasts to determine resource requirements in a variety of ways, including:
How many staff will be needed?
How much stock will be required?
Does capacity need to be expanded (or reduced)?
Does the equipment need to be upgraded, replaced or increased (or reduced)?
How much and which type of finance will be required?
Is promotional activity (e.g. advertising) required - and when?
Factors Affecting Sales Forecasts
Developing accurate sales forecasts is a skill and requires an understanding of several factors which can influence the reliability of the forecast
Consumer trends
Seasonal variations
Demand for certain goods is seasonal
Events such as major religious festivals, holiday periods and annual events impact demand for a wide range of products
E.g. sales of basic homewares increase when students start university each September
Fashion
Fashion is often led by celebrities, and their influence can have a short-term impact on sales
E.g. When Hollywood legend Megan Fox appeared in September 2021 at a star-studded event in a Boohoo dress, the company’s sales unexpectedly soared by over 400% during that month
Long term trends
Consumer behaviour, attitudes and spending habits change over time
In recent years, environmentally-conscious consumers have led to many businesses amending sales forecasts to reflect increased demand for green products
E.g. In late 2022, vehicle manufacturer Ford increased its sales forecasts for electric vehicles by almost 70%
Economic variables
Economic Growth
During periods of economic growth, increased consumer incomes will lead to higher than forecast sales
The opposite will occur during periods of economic slowdown and sales may be less than forecast
Inflation
The general increase in prices over time reduces consumers’ spending power
Firms may revise their sales forecasts downward during periods of rising inflation
Firms may revise their sales forecasts upwards during periods of falling inflation
Unemployment
Increased levels of unemployment are often experienced during periods of recession and tend to be a key cause of reduced spending in the economy
Sales forecasts for lifestyle and luxury goods may reduce as consumers focus their spending on essentials
Interest Rates
When interest rates rise, borrowing becomes more expensive for consumers
Businesses that sell products that consumers frequently buy on credit may therefore adjust their sales forecasts downward
E.g. Property sales are set to drop to 1.01billion in 2023 from 1.27b in 2022 causing many estate agencies to adjust their sales forecasts downward
Exchange Rates
Where the value of UK sterling falls against other global currencies, overseas consumers will find British exports become relatively cheaper
Businesses that sell products overseas or that cater for tourists visiting the UK may adjust their sales forecasts upwards to reflect the expected increase in demand from a cheaper £
E.g. Visit Britain expects the number of tourists entering Britain in 2023 will be 14% higher than in 2022
Actions of competitors
Sales forecasts should consider short-term actions of competitors such as sales promotions as well as longer-term strategies such as changes to product ranges and expansion plans
Competitor actions are difficult to predict so the usefulness of past data to predict future sales may be limited
E.g. Marks and Spencer announced plans to open twenty new high street stores in 2023, partly in response to the closure of several key competitors, including Debenhams
Difficulties of Sales Forecasting
Sales forecasting usually involves the use of past data to predict the future
In the short-term, sales forecasts are likely to reflect the recent past
Longer-term sales forecasting is often more problematic as several factors affect its reliability
The Difficulties of Sales Forecasting
Effective sales forecasting requires skill, time and the accurate use of timely data
Smaller businesses in particular may lack the experience or specialised personnel to construct, analyse and interpret sales forecasts
It is difficult to avoid experience bias (e.g. opinions of the future based on experiences in the past)
Businesses may face problems in constructing sales forecasts that ignore the priorities of key stakeholders
The future seldom repeats the occurrences of the past
Sales forecasts will rarely reflect the full range of external influences that can affect future inflows, such as fashions, trends and the actions of competitors
There is a significant amount of data available for businesses to consider when constructing sales forecasts
Internal data, such as previous sales figures, will be a key source of information when constructing forecasts
Selecting the most appropriate external data to support sales forecasts is extremely challenging and will require careful evaluation
Examiner Tip
Whilst sales forecasting as a planning tool has several potential uses for a business, you should carefully consider how a sales forecast is constructed when evaluating its usefulness.
Who is responsible for the sales forecast?
Which data is used in its construction?
How reliable or accurate are the data sources underpinning the forecast?
You may even conclude that no sales forecasting is better than a poorly-constructed, biased attempt!
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