Sales Forecasting

Sales Forecasting

Sales forecasting is the process of estimating future sales.

Cadburys has a ‘brand manager’ for each product within its portfolio.

How many different Cadbury products can you think of?

Each brand manager will focus on the likely future sales of the product they are responsible for.

Imagine this was your role for Creme Eggs (with a £60,000 salary, at least.)

What are the implications for Cadbury of a changing sales forecast for the products they make?

A sales forecast will have an impact on:

1. Investment decisions.

Investment involves the purchase of an asset, with the goal of earning increased income. 

Increased forecast sales will lead to increased investment in machinery.

2. The number and type of staff that are required.

More staff will be employed if the scale of operations increase.

3. Promotional activities.

If sales are forecast to fall a business may decide to increase promotion.

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Factors affecting sales forecasts:

1. Consumer trends.

Habits or behaviours currently prevalent among consumers of goods or services.

For example, increased sales of vegan products.

Confectionery makers reacting to consumer trends:

2. Economic variables.

Gross domestic product (GDP) growth indicates whether the UK economy is growing or contracting.

Figures above 0.0% indicate growth.

Most 'normal' products are likely to sell more if the economy is growing.

Some products will sell more when the economy is in decline.

Can you think of any examples?

3. Actions of competitors.

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Difficulties of sales forecasting:

Extrapolating (making predictions) from past sales data relies on previous trends continuing.

This can never be guaranteed.

It can be very difficult to forecast sales if you selling a product in a dynamic market

For a new product there is no previous sales data available to help you predict into the future.

How could McDonald's forecast sales of this product? 

Calculating Costs, Revenues and Profits

Sales revenue: 

Number of items sold x Selling price 
(The result is in £'s)

Sales volume:

Sales revenue  ÷
Selling price
(The result is in units sold)

Fixed, variable and total costs.

Fixed costs (FC) are the expenses that do not alter in relation to changes in output.

Examples:

Repayment of a bank loan (with interest) would be a fixed cost for the duration of the loan.

A one year loan of £10,000 at an interest rate of 10% per annum  (p.a.) would require the payment of £1,000 in interest.

Variable costs (VC): expenses that vary in direct proportion to changes in output.

Examples:



Average variable cost (AVC):

Total Variable Cost ÷ 
Number of units produced

Total costs = FC + VC

Profit: Total Revenue minus Total Cost (TR - TC)

More on this topic here.

  

Using Break-Even Analysis to Make Decisions

Using Break-Even Analysis to Make Decisions: • Contribution and contribution per unit • Calculation of break-even output • Construction of break-even charts • Analysing the effects of changing variables on break-even charts

The break even point is where Total Cost (TC) exactly equals Total Revenue (TR).

Break even formula:

Total Fixed cost (£)  ÷

Contribution per unit (£)

The result of this calculation shows the number of units that must be produced and sold to cover all the costs of the business.

There is therefore no profit and there is no loss.

Reaching the break even number of sales is usually an objective for a small business start-up.

On Sunday 9th February 2020 this business failed to reach its break even number of sales. 

                                     

Break even charts are useful for small business start ups because they can allow an entrepreneur to see what would happen if one of the variables changed.

In the exam you might be asked to draw a new line to show how the break even point will change if, for example, the price charged changed.

You might also be asked to calculate the break even number of units. 

This means the number of items a business must sell to cover its costs. (Remember the break even point is where TR=TC)

This video explains the calculation.

You will have to remember the formula in the exam so take careful note.

                                   

Margin of safety:

The difference between the actual level of output and the break even level of output.

Look at the box at the top of this page. 

Are you confident that you could answer an exam question on one of these topics?

Advantages of using break even:

It allows the entrepreneur to work out the profit or loss at each level of output.

The impact of a change in one of the variables can be identified.

Disadvantages:

Only really useful for a business that produces a single product.

Inaccurate information will make the results of the calculation invalid.

Break even question (from a different exam board) here.

More on break even here.

Setting Budgets

A budget is a forward financial plan.

Budgets AS Edexcel

The purpose of budgets:1. A planning tool.Setting a budget forces managers to think ahead.2. Forecasting.A business can work out future income and expenditure.3. Communication.Budgets are widely discussed within a business. Managers have a clear framework within which they operate.4. A motivational tool.Budgets provide a target for employees to aim for.Meeting targets is seen as a measure of success.There may be financial rewards if budgets are achieved.

What Lloyds TSB say about budgeting: Click on the picture.
                                                   

Historic / traditional budgeting:

A business sets a budget based on the previous years figures.

A very quick way of setting budgets.

It may not act as way of improving business performance.

Managers tend to spend all the money allocated in a particular budget.

Zero based budgeting

Every expenditure budget is set at zero.

Managers have to justify every £ of spending.

The purpose is to control costs.

May involve considerable management time. 

Budgeting video 1:

Variance analysis:

The 'variance' is the difference between the budgeted figure and the actual (real life) figure.

If the figure is not favourable for the business it is known as 'adverse' and the letters adv. would be written next to the number.

Adv:

If actual revenue or profit figures are higher than the budgeted figure or actual expenditure is lower than the budget this would be favourable (fav).

Fav:

Budgeting video 2:

Difficulties in setting budgets: Details here.

Final comment:

Budgets must be realistic and flexible enough to cope with changing circumstances.

Using Budgets

Using Budgets • The benefits and drawbacks of using budgets • The calculation and interpretation of favourable and adverse variances • Using variance analysis to inform decision making.

Candidates should be familiar with income, expenditure and profit budgets. They will not be required to analyse budgets by price and volume, nor to use flexible budgets.

Benefits and drawbacks of budgets. Nice link here.

Variance analysis video 1:



Variance analysis video 2: