sales-forecasting

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The need to forecast sales

Sales forecasts predict future revenues based on past sales figures
- They are an important business planning tool
- They can be used to identify trends in sales which can then be compared with the market as a whole
They commonly focus on what will happen in the future to:
- The volume and value of sales
- The size of the market
- Sales as a result of promotional activity
- Sales as a result of cyclical factors
Sales forecasts are an important tool to support planning and improve the validity of cash flow forecasts
Businesses use sales forecasts to determine resource requirements, such as
- How many staff are needed
- How much stock is required
- Whether capacity needs to be expanded or reduced
- Whether equipment needs to be upgraded or replaced
- How much and which type of finance is required
- Whether and when promotional activity (e.g. advertising) is required

Time series analysis

Raw sales data on its own may not be very useful for sales forecasting
- It can be hard to spot patterns, trends or seasonal changes by looking at rows of data or, even, data in a graph, especially if sales are volatile
  - In the example below, it would be difficult to draw a line of best fit in order to extrapolate and make sales forecasts

Example of raw data plotted in a chart

Table and scatter plot of monthly sales revenue in dollars. Data ranges from January to December, with revenues between $9,647 and $18,965. — **Sometimes it is difficult to identify a line of best fit to extrapolate a trend as raw sales data is volatile**

Businesses may uses time series analysis to smooth data, making it easier to predict likely sales in the future based on past performance

How to conduct a time series analysis

Step 1: Calculate moving totals

In this case, a three-month moving average will be calculated

Add together sales for January, February and March
Place the total alongside March

$equals space 15 comma 425 space plus space 9 comma 647 space plus space 12 comma 379 equals space 37 comma 451$

Now do the same for February, March and April
Place the total alongside March

$equals space space 9 comma 647 space plus space 12 comma 379 space plus space 17 comma 002 equals space 39 comma 028$

Now do the same for March, April and May
Place the total alongside May

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