2.2

• key factors that create variability in sales forecasting

  • consumer trends - demand in many markets changes as consumer tastes chnage, affects both overall market demand and the market shares of existing competitors.
  • economic variables - demand ofter sensative to changes in varibale such as exchnage rates, intrest rates or taxation.
  • competitors actions - hard to predicts, but often significant reason why sales forecasts prove over-optimistic.
• situations where actual sales are likely to be significantly different for the sales forecast

  • business is a new startup, hard to forecast sales.
  • market subject to significant distruption for technology changes.
  • demand is highly sensative to changes in price and income.
  • product is a fashion item.
  • management have demonstrated poor sales forecasting ability in past.
• extrapolation


  uses trends established from historical data to forecast the future.
• benefits of using extrapolation

  • simple method of forecasting
  • not much data required
  • quick and cheap
• drawbacks of using extrapolation

  • unrealibale if there are significant fluctuations in historical data.
  • assumes past trends will continue into the future - unlikely in many competitive business environments.
  • ignored qualitative factors like changes in tastes and fahsions.
• what is break even?

  • the break-even point is reached when the total revenue exactly matched the total costs and the business is not making a profit or a loss, if the firm can sell at production levels above this point it makes a profit.
• contribution per unit equation

  contribution per unit = selling price per unit - variable costs per unit.
• breakeven output (units) formula

  breakeven output (units) = fixed costs / contribution per unit or (sales revenue - varibale costs)
• margin of safety definition

  • is the difference between actual output and the breakeven output
• strengths of breakeven analysis

  • focuses on what output is required before a business reaches profitablity.
  • helps management and finance-providers better understand the viability and risk of a business or business idea.
  • margin of safety calculation shows how much a sales forecast prove over-optimistic before losses are incurred.
  • illustrates the importance of keeping fixed costs down to a minimum.
  • calculations are quite and easy.
• limitations of breakeven analysis

  • unrealistic assumptions - products are not sold at the same price at different levels of output; fixed costs do vary when output changes.
  • sales are unlikely to be the same as output - there may be some build up of stocks or wasted output too.
  • variable costs do not always stay the same e.g. as output rises the business may benefit from being able to buy inputs at lower prices.
  • most businesses sell more than one product
  • a planning aid rather than a decision making tool.
• revenue definition


  Describes the amount of income a business will earn over a period of time.
• benefits of forecasting revenue

  • have enough stock/raw materials to meet demand
  • reduces risk for new products
  • saves money as less waste or storage
  • helps improve brand image
  • helps the company to plan ahead
• difficulties in forecasting revenue

  • the future is uncertain
  • issues with supply of raw materials
  • changes with competitors
  • new products or business
  • changes in the economy
  • brand image/company reputation
• costs definition


  costs are amounts that a business incurs in order to make goods and/or provice services
• what is a budget?

  a financial plan for the future conerning the revenues and costs of a business
• principles of effective budgeting

  • managerial responsibilites are clearly defines
  • managers have a responsibility to adhere to their budgets
  • performance is monitored against the budget
  • corrective actions is taken if results differ significantly from the budget
  • unaccounted for variances are investigates