2.2.1 Sales forecasting

    Cards (16)

    • Sales Forecasting - Involves predicting the future sales of a business over a specific period.
    • The Purpose of Sales Forecasts:

      Sales forecasts are an important tool to support planning and can improve the validity of cash flow forecasts.
    • Sales Forecasts 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
    • Businesses use sales forecasts to determine resources 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)?
      • Is promotional activity (e.g. advertising) required - and when?
    • Factors Affecting Sales Forecasts:
      • Consumer trends
      • Economic variables
      • Actions of competitors
    • Consumer Trends:

      Seasonal variations - Demand for certain goods is seasonal. Events such as religious festivals, holiday periods and annual events impact demand for a wide range of products. E.g. Demand for Christmas trees increase each December.
    • Consumer Trends:

      Fashion - Fashion is often led by celebrities, and their influence can have a short term impact on sales. E.g. When Megan Fox appeared in a Boohoo dress, the company’s sales unexpectedly soared by over 400% during that month.
    • Consumer Trends:

      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.
    • Economic Variables:

      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.
    • Economic Variables:

      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.
    • Economic Variables:

      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.
    • Economic Variables:

      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 £. 
    • 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. M&S 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:
      • Accurate sales forecasting requires skill, time, and timely data.
      • Smaller businesses may lack experience or specialist staff to create and interpret forecasts.
      • Forecasts may overlook key stakeholders' priorities.
      • The future rarely mirrors the past.
      • External factors like trends, fashion, and competition often disrupt forecasts.
      • Businesses must sift through vast amounts of data.
      • Past sales data is crucial, but choosing the right external data requires careful judgment.