Sales Forecasts are charts and graphs, equations and educated predictions that allow businesses to predict future sales with a degree of accuracy.
- Consumer Trends – People being proud of bargains and discounts. sales forecasts become harder to predict when consumerism changes.
- Economic Variables – Recessions, Booms and Recovery.
- Competitors Actions – loss leaders and pricing strategy may try to undercut you.
- Digital Music for example, as become harder to predict as people have found new ways to obtain it illegally.
- Fashion Items have an unpredictable life span.
| Businesses use a range of forecasting tools to make forecasts
No single technique is reliable, but having multiple will allow you to better predict the future |
Using sales forecasts may be useful but having data that is unreliable could mean that the forecast is not accurate. Making forecasts that are too long into the future could be considered extrapolation.
Extrapolation is cheap, although inefficient it gives a fixed perspective of what to expect which is better than nothing.
Planning for the worst allows companies to expect and anticipate failure. Very successful stable products cannot predict when sales will fall as their product is likely very price inelastic and customers are used to the product’s taste or function that changing it could make customers unhappy with the product. ‘Many financial measurements which are useful and valid in static situations are strategic traps in growth situations.’
Failing to predict sales forecasts correctly
Failing to accurately predict sales forecasts may mean that a business could fail. Working capital is cash that is spent on the business, liquidity is not. Having a lot of working capital does not necessarily mean you are liquid. You may also have;
- Contingency Finance (A financial Cushion)
- Credit Periods yet to expire
- An active Working Capital Cycle
That must be paid before you consider any additional finance as liquid that you can spend on anything. Additionally when a business is in liquidation whereby they have had to cease trading there is still things that have to be paid off, and unfortunately for some employees, this may be unfair as it could mean a business cannot afford to pay them because they do not have the funds.
- The Tax Office must be paid, to cover the business from litigation.
- Shareholders must be paid dividends and the value of their shares.
- Employees must be paid their wages.
Some Key Terms
- An Income Statement – Measures the business performance over a period of time, and may allow them to determine where forecasting was over-optimistic. It shows a companys revenue and total spending over a given period of time.
- A Statement of Financial position is a snapshot of the business assets.
- A Cash flow statement shows cash flow sources over a given period of time. It shows exactly how much a business has received and spent.