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Study Notes

Sales forecasting

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

Sales forecasting is a crucial part of business planning.

The sales forecast forms the basis for most other common parts of business planning:

  • Human resource plan: how many people we need linked with expected output
  • Production / capacity plans
  • Cash flow forecasts
  • Profit forecasts and budgets
  • Part of regular competitor analysis and helps to focus market research

Key Factors Affecting the Accuracy and Reliability of Sales Forecasts

Sales forecasting requires a subjective judgement about an uncertain future. So it is inevitable that actual sales will differ from those forecast. Key factors that create this variability include:

  • Consumer trends
    • Demand in many markets changes as consumer tastes & fashions change
    • Affects both overall market demand & the market shares of existing competitors
  • Economic variables
    • Demand often sensitive to changes in variables such as exchange rates, interest rates, taxation etc.
    • Overall strength of the economy (GDP growth) also important
  • Competitor actions
    • Hard to predict, but often significant reason why sales forecasts prove over-optimistic

Circumstances Where Sales Forecasts Are Likely to be Inaccurate

The situations where actual sales are most likely to be significantly different from the sales forecast include:

  • Business is new – a startup (notoriously difficult to forecast sales)
  • Market subject to significant disruption from technological change
  • Demand is highly sensitive to changes in price and income (elasticity)
  • Product is a fashion item
  • Significant changes in market share (e.g. new market entrants)
  • Management have demonstrated poor sales forecasting ability in the past!

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