2-2-1-sales-forecasting

The purpose of sales forecasts

• Sales forecasts predict future revenues based on past sales figures

• 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 can improve the validity of cash flow forecasts

• Businesses use sales forecasts to determine resource requirements in a variety of ways, including:

  • How many staff will be needed?

  • How much stock will be required?

  • Does capacity need to be expanded (or reduced)?

  • Does the equipment need to be upgraded, replaced or increased (or reduced)?

  • How much and what type of finance will be required?

  • Is promotional activity (e.g. advertising) required — and when?

Factors affecting sales forecasts

• Developing accurate sales forecasts is a skill that requires an understanding of several factors that can influence the reliability of the forecast

Consumer trends

• Seasonal variations

  • Demand for certain goods is seasonal

  • Events such as major religious festivals, holiday periods and annual events impact demand for a wide range of products

    • For example, sales of basic homewares increase when students start university each September

• Fashion

  • Fashion is often led by celebrities, and their influence can have a short-term impact on sales

    • For example, when Hollywood legend Megan Fox appeared in September 2021 at a star-studded event in a Boohoo dress, the company’s sales unexpectedly soared by more than 400% during that month

• Long-term trends

  • Consumer behaviour, attitudes and spending habits change over time

    • In recent years, environmentally conscious consumers have led many businesses to amend sales forecasts to reflect increased demand for green products

    • For example, in late 2022, vehicle manufacturer Ford increased its sales forecasts for electric vehicles by almost 70% 

Economic variables

• Economic growth

  • During periods of economic growth, increased consumer incomes will lead to higher-than-forecast sales

  • The opposite will occur during periods of economic slowdown, and sales may be lower than forecast

• Inflation

  • The general increase in prices over time reduces consumers’ spending power

    • Firms may revise their sales forecasts downwards during periods of rising inflation

    • Firms may revise their sales forecasts upwards during periods of falling inflation

• Unemployment

  • Increased levels of unemployment are often experienced during periods of recession and tend to be a key cause of reduced spending in the economy

    • Sales forecasts for lifestyle and luxury goods may reduce as consumers focus their spending on essentials

• Interest rates

  • When interest rates rise, borrowing becomes more expensive for consumers

  • Businesses that sell products that consumers frequently buy on credit may therefore adjust their sales forecasts downwards

    • For example, property sales are set to drop to 1.01bn in 2023 from 1.27bn in 2022, causing many estate agencies to adjust their sales forecasts downwards

• Exchange rates

  • When the value of the UK pound sterling falls against other global currencies, overseas consumers will find that British exports become relatively cheaper

  • Businesses that sell products overseas or that cater to tourists visiting the UK may adjust their sales forecasts upwards to reflect the expected increase in demand from a cheaper sterling

    • For example, Visit Britain expects the number of tourists entering Britain in 2023 to be 14% higher than in 2022

Actions of competitors

• Sales forecasts should consider the short-term actions of competitors, such as sales promotions, as well as longer-term strategies, such as changes to product ranges and expansion plans

• Competitor actions are difficult to predict, so the usefulness of past data to predict future sales may be limited

  • For example, Marks & Spencer announced plans to open 20 new high street stores in 2023, partly in response to the closure of several key competitors, including Debenhams

Difficulties of sales forecasting

• Sales forecasting usually involves the use of past data to predict the future

• In the short term, sales forecasts are likely to reflect the recent past

• Longer-term sales forecasting is often more problematic, as several factors affect its reliability

The main difficulties of sales forecasting

• Effective sales forecasting requires skill, time and the accurate use of timely data

  • Smaller businesses in particular may lack the experience or specialised personnel to construct, analyse and interpret sales forecasts

    • It is difficult to avoid experience bias (e.g. opinions of the future based on experiences in the past) 

    • Businesses may face problems in constructing sales forecasts that ignore the priorities of key stakeholders

• The future seldom repeats the occurrences of the past

  • Sales forecasts will rarely reflect the full range of external influences that can affect future inflows, such as fashions, trends and the actions of competitors 

• There is a significant amount of data available for businesses to consider when constructing sales forecasts

  • Internal data, such as previous sales figures, will be a key source of information when constructing forecasts

  • Selecting the most appropriate external data to support sales forecasts is extremely challenging and requires careful evaluation