Sales Forecasting Flashcards
(20 cards)
Define sales forecasting
Projection of achievable sales revenue, based on historical sales data, analysis of market surveys and trends, and salespersons’ estimates. Also called sales budget, it forms the basis of a business plan because the level of sales revenue affects practically every aspect of a business.
The method of sales forecasting used by a business will depend on the nature of the product and the market situation.
Purpose of sales forecasting
A sales forecast acts as a goal against which a business can measure its progress. It also drives
many other decisions within the firm. For example: planning production levels and scheduling; planning cash flows; planning human resources (through workforce planning).
Define brainstorming
Frequently employees who have experience of the market will ‘brainstorm’. They will get together to ‘bounce’ ideas off each other in order to determine their collective best estimate of what is likely to happen in the future. Use might be made of previous life cycles of similar products.
Define intuition
An experienced manager is often able to predict sales based on intuition or a ‘hunch’. The use of
intuition is cheap, and fast. But gut feeling and experience should not be the only guide.
Define the delphi method
This uses expert opinion to predict the future, on the basis that better predictions are made by human
experts than from extrapolating trends
Advantages of the delphi method
- Experts can reconsider their judgements after reading feedback from other members of the expert group.
- It is flexible enough to be used in a variety of situations and be applied to a range of complex problems.
- Participants have time to think through their ideas leading to a better quality of response.
- The Delphi method creates a record of the expert group’s responses and ideas, which can be used when needed
Disadvantages of the delphi method
- All depends on the content and structure of the questionnaires.
- It assumes that experts are willing to come to a consensus and allow their opinions to be altered by the views of other experts.
- Expert panels often lose members because of boredom,
and disillusionment with the process. - Monetary payments to the experts may lead to bias in the results of the study.
- The method will more than likely require a substantial length of time to complete and can be costly in terms of the researcher’s time.
Explain random factor analysis
This method of analysis attempts to explain how unusual or extreme sales figures occur. For example,
if sales of ice cream doubles for a two-week period, then could this be explained by weather conditions, rather than an effective advertising campaign? Random factor analysis therefore attempts to provide explanations for unusual or abnormal sales activity
External factors affecting sales forecasting
- Economic factors – business cycle, exchange rates
- Consumer factors – changing tastes and fashions
- Competition factors – they will have their own strategies and plans.
Explain seasonal analysis
Sales are measured on a monthly or weekly basis to examine the seasonality of demand. In some
industries, the seasonality index experiences huge swings. For example, toy makers are likely to experience peak demand in the month leading up to Christmas. Data from a seasonality index may be used to determine safety lead
times or safety stock levels.
Explain trend analysis
This focuses on long-term data, which has been collected over several years. The objective is to determine the general trend of sales - rising, falling or stagnant.
Explain cyclical analysis
In time-series analysis it is the variation which can be attributed to the economic or trade cycle. For
example, the increase in demand for consumer durables after a period of recession may be cyclical rather than indicate a change in the underlying trend.
Define qualitative sales forecasting
Dealing with wider issues than just numbers, such as forecasting when there might be a shift in
popularity from mountain bikes to road bikes.
Advantages of qualitative sales forecasting
- Involves people’s knowledge of the market and uses their intuition and ‘hunches’, which can provide a
greater insight into future trends than statistical data. - It considers known future conditions.
Disadvantages of qualitative sales forecasting
- It involves people’s perceptions of what might happen, which might be biased to further their own ends.
- Often ‘experts’ disagree completely
Define moving averages
Extrapolation involves identifying the underlying trend in past data and projecting this trend forwards. Extrapolation predicts future trends based on what has happened in the past. It assumes that nothing much is going to change
Advantages of moving averages
- Helps the business to plan.
- Helps financial planning, including cash flow management.
- Can help with production planning e.g. ordering in the
correct number of raw materials. - Human resource planning, getting the right number and
type of staff in the jobs that are needed. - May motivate managers to reach targets.
Disadvantages of moving averages
- It uses information from the past and does not consider what might happen in the future (such as a competitor launching a new product or if the economy might
go into recession, supplies of raw materials might be disrupted, etc). - It can only be useful when sales have been stable with no major upsets.
- It is only as accurate as the information collected.
- It assumes that consumers will maintain their buying habits.
- Does not account for qualitative issues
Qualitative factors of sales forecasting
- Production factors - will new machinery be compatible with the existing machinery? Will new supplier be reliable? (Spaces after sales service, etc.)
- Personnel factors - will new machinery or network suit the staff? (Training/Safety/ Redundancies/Morale/Motivation.)
- Image - gaining prestigious order, good PR, better quality product.
- Aims of the organisation - if the business places a high value on social issues it might reject a profitable investment if it is considered to exploit the workplace or damage the environment
Quantitative factors of sales forecasting
- Businesses which are unprofitable eventually go out of
business. - Reliability of quantitative data based on market research and predictions. Figures predicted 5 years ahead may be inaccurate, undermining investment appraisal.
- Recessions/Booms.
- The economy can impact upon quantitative predictions. A rise in interest rates will require a project to be more profitable in the future.
