Benefits & Limitations of Sales Forecasting (DP IB Business Management)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
An Introduction to Sales Forecasting
Sales forecasts predict future revenues based on past figures, including
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
Diagram: illustrating a typical sales forecasting process
In order to construct effective sales forecasts, businesses use a range of techniques, including
Market research
Can include primary and secondary research sources
May rely on test marketing to understand customer reactions
Sample size needs to be sufficient to provide high data confidence
Extrapolation
Using historical data to identify and extend trends to predict future sales
Typically uses a line of best fit to make predictions
Requires strong correlations between data sets such as spending on promotional activity and sales revenue
Time series analysis
Identifying underlying trends from past sales figures recorded at regular intervals
Must take into account seasonal, cyclical and random variations
Factors that Require Sales Forecasts to be Adjusted
Developing accurate sales forecasts is a skill and requires an understanding of several factors which can influence the reliability of the forecast. These include
Consumer trends
Changing economic variables
The actions of competitors
Consumer Trends that Require Sales Forecasts to be Adjusted
Factor | Explanation |
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Seasonal variations |
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Fashion |
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Long term trends |
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Changing Economic Conditions that Require Sales Forecasts to be Adjusted
Factor | Explanation |
---|---|
Economic growth |
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Inflation |
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Unemployment |
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Interest rates |
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Exchange rates |
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Changing Economic Conditions that Require Sales Forecasts to be Adjusted
Factor | Explanation |
---|---|
Actions of competitors |
|
Evaluating Sales Forecasts
The 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
Diagram: reasons why sales forecasting is hard
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
Too much data blurs the analysis
Internal data, such as previous sales figures, will be a key source of information when constructing forecasts
Selecting the most appropriate external data is extremely challenging and requires careful evaluation
The Advantages of Sales Forecasting
Advantage | Explanation |
---|---|
Financial planning |
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Resource planning |
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Marketing strategy |
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Stakeholder confidence |
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Examiner Tips and Tricks
When evaluating sales forecasts, always carefully consider how the sales forecast is constructed.
Which data was used in its construction?
How reliable or accurate are the data sources underpinning the forecast?
How experienced was the person constructing the forecast?
You may even conclude that no sales forecasting is better than a poorly-constructed, biased attempt!
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