2.2.1 Sales Forecasting

Sales Forecasting

Key Definitions

Sales Forecasting: The process of estimating trends in future sales or costs for the business with some accuracy.

Trends: The general path that a series of values follow over time, ignoring any variations or random fluctuations in the figures. 

Contingency Plans: A 'Plan B' for the business in case something goes wrong for the business in terms of cash flow or stock due to forecasts being underestimated.

Real Income: The income earned by a consumer once inflation rates have been subtracted, and also known as 'disposable income'. Calculated by subtracting the percentage increase in prices from the percentage increase in average earnings.

Income Elasticity: The measure of how much the demand for a product changes when there is a change in consumer's real incomes.

The Purpose of Sales Forecasts

Managers need to look ahead and think about what is likely to happen in their chosen industry so they can prepare all areas of their business accordingly. One of the most important forecasts they will make is the sales forecast, which forms the basis of most of the other plans within the business, such as:

• The human resource plan will need to be based on the expected level of sales - a growth in sales may require the business to have more staff.
  
• The cash flow forecasts will depend on the projected sales for the upcoming months.
  
• The profit forecasts will depend on the predicted level of revenue coming into the business.
  
• The production scheduling will depend on the level of output required to meet the predictions in the forecast. 

The sales forecast, therefore, drives many of the other plans within the business making it an essential element of effective management planning. 

When a new business starts up it is extremely difficult to interpret its sales data. As long as a business can survive the first couple of years the managers will find it gradually easier to interpret the sales data. Managers need to understand the trend in their product sales and then compare their figures to the market as a whole. 

Factors Affecting Sales Forecasts

Consumer Trends

Consumer tastes and habits change over time. The changes can occasionally be quite 'dramatic', with rapid changes in demand. One way for a forecaster to deal with this is to plot the previous trends on a graph and then consider what the future trends are likely to be. The data used in sales forecasts can also depend on more than just changes in consumer trends - they could be affected by changes in season, for example. The factors that affect medium-to-longer consumer trends include:

• Changing tastes and habits - such as the concern for body shape and image, or the increasing demand for convenience and lifestyle changes.
  
• Demographic changes - such as the increasing prevalence of an aging population in the UK creating new opportunities for business catering to that demographic.
  
• Increasing globalisation - both as a force in business and more adventurous holiday-making, creating changes in niche and mass markets.
  
• Changes in affluence - the idea of buying things like water was unthinkable in the past, but over time this has changed and become a massively valuable market. 

Economic Variables

Many products have sales that are largely unaffected by changes in the economy, but others are highly sensitive to these changes as they are highly income elastic. This means that their sales are highly dependent on changes in consumer's real incomes. Other economic variables that could affect a sales forecast include:

• A sharp fall in the value of the currency - this would make imports more expensive which could help increase domestic sales, so the sales forecast for a local producer may prove to be overly cautious.
  
• A sharp increase in tax rates - this would make the price of goods more expensive due to the increase in VAT, so less of the more expensive goods would be sold.
  
• Increased inflation rates - this would be a factor if price increases are not matched by increases in household incomes, forcing consumers to suffer a decrease in spending power as the real incomes decline. 

Actions of Competitors

If a business fails to predict the rise of sales of a competitor this could undermine their sales forecast as they may sell less of their products than they initially forecasted to. This is also the case if a new competitor emerges onto the market with a strong brand, as their sales may increase at the cost of the existing business, meaning that the new competitor would take sales from the existing business. 

Difficulties of Sales Forecasting

The easiest way to predict the future is to assume that it will be the same as the past was. This may be accurate for the immediate future as the economic climate or demand is unlikely to undergo a drastic change. This makes it reasonable to assume that patterns of near-future sales will continue to follow recent trends. 

Forecasting based on the continuation of previous trends is known as 'extrapolation' and it is the most common form of forecasting used as the basis of most economic forecasts. However, these are only correct if the future does continue to be similar to the past. This works sometimes, but other times it will be disastrously wrong.