IB Business Management 4.3 Sales Forecasting

Learning Outcomes To be able to calculate up to a four-part moving average including: - Seasonal - Cyclical - Random - Variation Using given data (A04) To understand, apply and analyse the benefits and limitations of sales forecasting (A03)

Essential Question How important is it for a business to have an accurate prediction of sales? How can they do this? 1 Not at all important 10 Vital

“The process of predicting what a firm’s Sales forecasting “The process of predicting what a firm’s future sales will be”

Sales Forecasting It is not only useful to be able to know where the business is now Businesses also want to be able to make predictions about what will happen in the future This is difficult as there are lots of variables to consider

Importance of Sales Forecasting Reduces uncertainty Improves stock management Improves cash flow management Minimise waste, maximise opportunities, improve efficiency Improved planning for growth To help make informed decisions Easier to secure external sources of finance BUT HOW/WHY DOES SALES FORCASTING ACHIEVE THE ABOVE?

What information would firms need in order to forecast future demand? Current sales data Current market demand Market trends Economic data Competitor information

Sales Forecasting Techniques Time Series Analysis – quantitative sales forecasting method which considers: - Sales Trends - Seasonal fluctuations - Cyclical fluctuations - Random fluctuations Extrapolation – Once past trends and patterns established, a more informed judgment can be made about the future. Represented by a dotted line on a chart.

Time-Series Analysis Used to analyse movements of sales over a time period – usually years, quarters, months, etc. Importance of assessing the: Trend Seasonality Key moments Magnitude

Moving Averages Used to help extrapolate data that may have fluctuations. Averages are calculated and plotted in order to smooth out spikes or dips

Three - Year Moving Average Open up the “Moving averages” document on Haiku – we will go through.

Four - Year Moving Average P.368 in new Hoang – lets practice first! MONTH/ YEAR SALES ($) (‘000’s) 4 POINT MOVING AVERAGE CENTRED VARIATION 1 20 2 30 3 40 4 5 60

Task Acosta Adventures p.371 Download the Excel sheet from Haiku and use formulas to calculate the 4 point moving average Centre the results from the 4 point moving average Calculate the variance from the actual sales Extrapolate the trend for quarter 4 of next year

Task Acosta Adnentures p.369 Download the Excel sheet from Haiku and use formulas to calculate the 4 point moving average Centre the results from the 4 point moving average Calculate the variance from the actual sales

Extrapolation A method used to look in the short term future. Involves identifying trends and extending this to predict future sales.

How might we extrapolate the following?

Choosing a method (1) The degree of accuracy required – if the decisions that are to be made on the basis of the sales forecast have high risks attached to them, then it stands to reason that the forecast should be prepared as accurately as possible. However, this involves more cost (2) The availability of data and information - in some markets there is a wealth of available sales information (e.g. clothing retail, food retailing, holidays); in others it is hard to find reliable, up-to-date information (3) The time horizon that the sales forecast is intended to cover. For example, are we forecasting next weeks’ sales, or are we trying to forecast what will happen to the overall size of the market in the next five years? (4) The position of the products in its life cycle. For example, for products at the “introductory” stage of the product life cycle, less sales data and information may be available than for products at the “maturity” stage when time series can be a useful forecasting method.

Benefits of Sales Forecasting Improved working capital and cash flow Improved stock control Improved productive efficiency Helps secure external finance Improved budgeting

Limitations of Sales Forecasting Limited information Inaccuracy of predictions Reliability of forecast reliant upon the reliability of data being used External environment can change unexpectedly and affect sales positively or negatively but can’t be predicted in the forecast Quantitative and does not account for potential qualitative factors e.g. social trends

Concepts - CUEGIS How is sales forecasting relevant to the concepts?