Benefits & Limitations of Sales Forecasting (HL IB Business Management)

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
  
  • E.g. sales of basic homewares increase when students start university each September

Fashion

• Fashion is often led by celebrities and their influence can have a relatively short-term impact on sales
  
  • E.g. 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 over 400% during that month

Long term trends

• Consumer behaviour, attitudes and spending habits change over time
  
  • In recent years environmentally-conscious consumers have led to many businesses amending sales forecasts to reflect increased demand for green products
    
    • E.g. In late 2022 vehicle manufacturer Ford increased its sales forecasts for electric vehicles by almost 70% 

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 less 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
  • E.g. Property sales in a country are set to drop to 1.01billion in 2023 from 1.27b in 2022 causing many estate agencies to adjust their sales forecasts downwards

Exchange rates

• Where the value of UK sterling falls against other global currencies, overseas consumers will find British exports become relatively cheaper
• Businesses that sell products overseas or that cater for tourists visiting the UK may adjust their sales forecasts upwards to reflect the expected increase in demand from a cheaper £
  
  • E.g. Visit Britain expects the number of tourists entering Britain in 2023 will be 14% higher than in 2022

Actions of competitors

• Sales forecasts must consider 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 use of past data to predict future sales may be limited as a result
  
  • E.g. UK Company Marks and Spencer announced plans to open twenty new high street stores in 2023, partly in response to the closure of several key competitors including Debenhams

Financial planning

• Sales forecasts can be used to create budgets, set pricing strategies and make financial preparations
  • Better cash flow management improves financial stability
  • Finance can be sourced in advance
• Sales forecasts can provide a benchmark against which actual performance can be measured
  • Helps identify areas for improvement and set targets

Resource planning

• Sales forecasts support production schedules and stock management
  • Helps prevent overstocking or stockouts which reduces associated costs and improves reliability
  • Negotiate in advance with suppliers  and ensure a smooth flow of materials to meet production requirements
• Sales forecasts help to determine staffing and capital equipment requirements in advance
  • Less reliance on expensive temporary solutions such as leasing or subcontracting

Marketing strategy

• Helps in planning new product launches or updates to existing products
  • Sales projections can determine the best time to introduce new products
• Determine promotional activity
  • Products expected to have high demand may need less advertising
  • If sales are projected to be slow sales promotions can be planned to stimulate demand in advance

Stakeholder confidence

• Accurately forecasting sales allows a business to improve customer experience
  • Can ensure product availability and timely deliveries
• Reliable sales forecasts can increase the confidence of shareholders
  • Well-managed sales performance improves a company's reputation and makes it more attractive to potential investors
• Banks may be more willing to lend to businesses that are able to predict future performance with confidence