BUSINESS MANAGEMENT (IBDP)

Unit 4: Marketing
4.3 Sales Forecasting (HL only)

Learning objectives:
A04 - Up to four-part moving average, sales trends and forecast (including seasonal, cyclical and
random variation) using given data.
A03 - The benefits and limitations of sales forecasting.

Definitions:
Correlation shows the degree to which two sets of numbers or variables are related, e.g. sales
revenue over a period of time. Marketers are interested in establishing a strong correlation
between marketing expenditure and sales growth.

Cyclical variations are recurrent fluctuations in sales linked to the economic cycle of booms and
slumps. Unlike seasonal variations, cyclical variations can last longer than a year.

Moving averages are used to find underlying trends by smoothing out variations in a data set
caused by seasonal, cyclical and random variations. It is common to use up to four-part moving
averages, i.e. averaging sales figures for four consecutive time periods.

Sales forecasting is a quantitative management technique used to predict a firms level of sales
over a given time period.
Seasonal variations are periodic fluctuations in sales revenues over a specified time period,
such as certain months or quarters of the year.
Random variations are unpredictable fluctuations in sales revenues caused by erratic and
irregular factors that cannot be practically anticipated.

Time series analysis is a sales forecasting technique that attempts to predict sales levels by
identifying the underlying trend from a sequence of actual sales figures.

 Sales forecasting
 Quantitative techniques to estimate future sales using a range of
forecasting techniques.
 Forecasting allows for smoother cash-flow management,
inventory & production, financing and budgeting.
 Managers use several sales forecasting techniques such as
a) Extrapolation is a forecasting technique used to identify the trend by using past
data and extending this trend to predict future sales.
b) Market research - identifying and forecasting the buying habits
of consumers can be vital to a firm's prosperity and survival.
c)Time series analysis: (see below)
d) Moving average: (See below)
 Benefits of sales forecasting:
 Provides valuable information for a business about the
trend of sales and what to expect in terms of revenue.
 Lets a business use quantitative data (past sales) and
qualitative data (impending changes) to assess the future of the
company’s sales and success.
 Limitations of sales forecasting:
 No one can predict the future.
 Using different methods, businesses will end up with
different scenarios and different trends.
 May confuse the business on what strategy to use.

 Methods of forecasting
a) Four part (Year) moving average sales trends
 In order to remove the variations produced by seasons,
trade cycles and other variations, and moving average is used to
make data smoother
 Given a set of actual sales, you take the average of four
points of data (eg. 4 values of revenue/month) and average them,
moving left-right
 Corresponds with how sales are usually reported which is
quarterly
 More difficult than 3 part moving average (only 3 points
are used)
b) Time series analysis
 Predicts future sales by identifying underlying trend line
  Seasonal fluctuations
 Seasonal variations in demand.
 e.g. pre-Christmas season is capitalized in the
USA through the Black Friday and Cyber Monday sales
 Random fluctuations
 Unpredictable fluctuations in sales.
 Cyclical fluctuations
 Variations linked to economic cycle of booms
and slumps
c) Extrapolation
 Plotting historical data and extending the trend to project
future sales
 Simple but not very accurate
d) Delphi technique
 Using a panel of independent experts
 Experts go through a sequence of questionnaires, each of
which builds on previous ones, lasting throughout several rounds
 A facilitator provides an anonymous summary of the
experts’ forecasts from the previous round as well as the reasons
for their judgments
e) Market research
 Identify trends and external changes that can impact sales
and combine with statistical data

https://youtu.be/dWxJoHoewqY
Forecasting using the moving-average method
The results from Table 20.4 can now be used for short-term forecasting. You will need to:
1 Plot the trend (moving average) results on a time-series graph (Figure 20.6).
2 Extrapolate this into the future – short-term extrapolations are likely to be the most accurate.
3 Read of the forecast trend result from the graph for the period under review, e.g. quarter 2 in
year 2015.
4 Adjust this by the average seasonal variation for quarter 2.

Practical question: