Quantitative sales forecasting

Question 1

Define SALES FORECASTING

Answer 1

Sales forecasting is a method of predicting future sales using statistical methods measured either by value or volume.

Question 2

What are the advantages of sales forecasting?

Answer 2

• Helps to produce cash flow forecasts
• Helps when planning orders, controlling stock levels and production
• Helps to ensure that the business has the right people working there at the right time.
• Used to set targets that can be used to motivate staff
• Helps when planning promotional campaigns

Question 3

What are the limitations of sales forecasting?

Answer 3

• The past is not always a good indication of the future
• Sales will be influenced by external changes (PESTLE changes)
• Unexpected events are not considered
• The data collected may be bias
  The further into the future, the more uncertainty and the less reliable these techniques are.

Question 4

What is the method for forecasting sales using a 3 period moving average?

Answer 4

1. Collate the raw sales data in time order
2. Add the first 3 pieces of data together and divide by three. Drop down one and repeat until the data is ‘smoothed out’.
3. Plot the moving averages on a graph and draw a line of best fit to illustrate the trend.
4. Extrapolate the line of best fit to forecast future sales for a particular period.

Question 5

Define CYCLICAL VARIATION

Answer 5

Cyclical variation is a method used to gain a more accurate sales forecast for businesses whose sales are very volatile e.g. through seasonal variation.

Question 6

What is the method for calculating cyclical variation?

Answer 6

1. Find individual variations for each of the periods (e.g. all period 2) by doing actual sales - trend sales.
2. Add them together and divide by the number there are.
3. Adjust the forecast on the time series graph by adding the cyclical variation to the originally foretasted number.

Question 7

What is the method for forecasting sales using a 4 period moving average?

Answer 7

1. Collate the raw sales data in time order.
2. Add the first 4 pieces of data together. Then drop down an add the next 4 pieces, and so on.
3. Take the first two 4 quarter moving totals and add them together to get the 8 point moving total.
4. Take the 8 point moving totals and divide by 8.
5. Put the moving averages into a graph and extrapolate the line of best fit to forecast future sales.