Benefits & Limitations of Sales Forecasting (DP IB Business Management)

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 is often led by celebrities and their influence can have a relatively 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

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% 

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

The general increase in prices over time reduces consumers’ spending power

• Firms may revise their sales forecasts downwards during periods of rising inflation

• Firms may revise their sales forecasts upwards during periods of falling inflation

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

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 downwards

• E.g. Property sales in a country are set to drop to 1.01billion in 2023 from 1.27b in 2022 causing many estate agencies to adjust their sales forecasts downwards

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

Sales forecasts must 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 use of past data to predict future sales may be limited as a result

• E.g. UK Company 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

Sales forecasts can be used to create budgets, set pricing strategies and make financial preparations

• Better cash flow management improves financial stability

• Finance can be sourced in advance

Sales forecasts can provide a benchmark against which actual performance can be measured

• Helps identify areas for improvement and set targets

Sales forecasts support production schedules and stock management

• Helps prevent overstocking or stockouts which reduces associated costs and improves reliability

• Negotiate in advance with suppliers  and ensure a smooth flow of materials to meet production requirements

Sales forecasts help to determine staffing and capital equipment requirements in advance

• Less reliance on expensive temporary solutions such as leasing or subcontracting

Helps in planning new product launches or updates to existing products

• Sales projections can determine the best time to introduce new products

Determine promotional activity

• Products expected to have high demand may need less advertising

• If sales are projected to be slow sales promotions can be planned to stimulate demand in advance

Accurately forecasting sales allows a business to improve customer experience

• Can ensure product availability and timely deliveries

Reliable sales forecasts can increase the confidence of shareholders

• Well-managed sales performance improves a company's reputation and makes it more attractive to potential investors

Banks may be more willing to lend to businesses that are able to predict future performance with confidence