4.3 Sales Forecasting - HL

• Sales forecasting

  a quantitative management technique used to predict a firms level of sales over a give time period. 
• Why is sales forecasting important

  can help a business to identify problems and opportunities in advance.
• What is the issue with sales forecasting?

  predicting the future is difficult because of the amount of variables that are subject to change. = may be inaccurate. 
• To make realistic and accurate sales forecasts, managers use a different number of sales forecasting techniques.

  • Market research
  • Extrapolation
  • Time Series Analysis
• What is market research?

  Identifying and forecasting the buying habits of consumers can be vital to a firm's prosperity and survival
• What is extrapolation?

  • Identifying a firm's sales trends by using historical data and extending this trend to predict future sales. 
• How do we show extrapolation

  • shown by a line of best fit, graphically shows trend
  • works well when there's a clear correlation between sales revenue over time or marketing expense and sales growth.
• What is a Time series analysis?


  • attempt to predict sales levels by identifying the underlying trend from a sequence of actual sales figures recorded at regular intervals in the past.
• To improve accuracy, managers must account for three types of variation that impact time series analysis

  1. Seasonal variations
  2. cyclical variations
  3. random variations
• What are seasonal variations ?

  these are periodic fluctuations in sales revenues during different times of the year
• What are cyclical variations

  These are recurrent fluctuations in sales revenues linked to the economic cycle of booms and slumps. Unlike seasonal variations, this can last longer than a year 
• What are random variations?

  these are unpredictable fluctuations in sales revenues caused by erratic and irregular factors that cannot be practically or reasonably anticipated. 
• In practice, businesses are likely to use a combination of sales forecasting methods. The choice depends on several factors, such as:

  1. accuracy
  2. time
  3. cost
  4. stage in a product life cycle
• What are the benefits of sales forecasting ?

  1. improved working capital and cash flow
  2. improved stock control
  3. improved productive efficiency
  4. helps to secure external sources of finance
  5. improved budgeting
• Benefit of sales forecasting - Improved working capital and cash flow

  • helps identify seasonal fluctuations in demand for its products
• The benefit of sales forecasting - Improved stock control

  helps ensure that the correct levels of stocks are available for use in production at different times of the year.
• The benefit of sales forecasting - Improved product efficiency

   The ability to plan for the correct level of production means better use of resources.
• The benefit of sales forecasting - Helps to secure external sources of finance

  helps to obtain external financing from investors and commercial lenders. 
• the benefits of sales forecasting -Improved budgeting


  accurate sales forecasting helps managers to anticipate changes such as seasonal variations, therefore adjust budgets accordingly.
• the benefits of sales forecasting - External Influences 


  the external business environment causes changes that may not be predictable, such as natural disasters from abroad unexpected fluctuations in the business cycle or adverse weather conditions.
• What are the limitations of sales forecasting?

  1. limited information
  2. inaccuracy of predictions
  3. Garbage in, Garbage out
• the limitations of sales forecasting - Limited information

  • sales forecasting is a prediction based on historical data and trends,
  • doesnt reveal the whole picture without any consideration of qualitative factors that affect actual sales.
• The limitations of sales forecasting - inaccuracy of predictions

  sales forecasting is part fact and part guesswork. There can be an element of bias or subjectivity.
• limitations of sales forecasting - Garbage in, garbage out

  if data and information used to predict are outdated, irrelevant, or heavily biased, then the forecasts are unrealistic and a little or no value to management.
• what is GIGO ?

  garbage in, garbage out