Sales forecasting – This is the process of estimating the future sales of the business
A) Purpose of sales forecasts
Sales forecasting allows the business to decide whether it needs to increase productive capacity and employ more workers in the future. For example, if sales are forecasted to be much higher in certain months then temporary staff may be needed in order to cope with the increased demand. Sales forecasting also allows the business to work out its cash flow forecast as it helps to estimate the cash inflows of the business. In addition to this, sales forecasting can help the business to identify when a business should start its promotional activity. For example, if sales are forecasted to decline, the business could then start to promote the product in order to extend its product life cycle.
B) Factors affecting sales forecasts:
- Consumer trends – Businesses sales forecasts may be affected regularly if they work in an industry that is based on consumer tastes and fashions e.g. the clothing industry. Changes in tastes and fashions may result in a business’s good/service becoming less popular and therefore resulting in the business having to revise down their sales forecast.
- Economics variables – Demand for good/services can be affected by a range of economics variables such as interest rates and exchange rates. For example, if the economy was to experience a recession then the demand for goods/services would drop dramatically due to a reduction in consumer incomes. Therefore businesses would have to revise down their sales forecasts. However, for some businesses that sell inferior goods such as Aldi may revise their sales forecasts upwards. This is due to the fact that the as incomes fall the demand for inferior goods increases as they have a negative income elasticity of demand.
- Actions of competitors – Competitors may make actions that cannot be anticipated that may have a big impact on businesses sales forecasts. For example, if a major competitor suddenly adopted a predatory pricing strategy then it is likely to result in a big fall in the demand for the businesses goods/services. As a result of this, sales forecasts may have to be revised down.
C) Difficulties of sales forecasting
Dynamic markets – Markets that are rapidly changing will be extremely hard to forecast sales for due to the fact that they will have to keep on being adjusted in order to reflect the changing market conditions. Therefore, sales forecasting will be very inaccurate beyond a very short period of time in the future. This reduces the benefits gained from sales forecasting for businesses in dynamic markets.
Start-up businesses – Businesses that are just starting up will find it extremely difficult to forecast sales due to the fact that they have no experience of the market conditions. Furthermore, they have no previous sales data that could give them a clue as to what future sales are going to be.
Income and price elastic demand – If the demand for a business’s goods/services is very income or price elastic then it will have a big impact on the ability on the accuracy of sales forecasting. This is due to the fact that small changes in the market (price) or changes in the economics conditions (incomes) will have a significant impact on the demand for the businesses goods/services. As a result of this the impact on the sales forecasting will be massive. Therefore there is a greater risk of sales forecasting being inaccurate.