4.
3 SALES FORECASTING
SALES FORECASTING
A quantitative management technique used to
predict a firm’s level of sales over a given time
period.
WHY YOU NEED TO FORECAST
SALES?
It is important because sales forecasts can help a
firm to identify problems and opportunities in
advance.
BENEFITS OF SALES
FORECASTING
Improved working capital and cash flow - helps
identify seasonal fluctuations in the demand of
products.
BENEFITS OF SALES
FORECASTING
Improved stock control -helps to ensure the correct
level of stocks are available
BENEFITS OF SALES
FORECASTING
Improved productive efficiency - helps better use of
firm’s resources
BENEFITS OF SALES
FORECASTING
Helps to secure external sources of finance
BENEFITS OF SALES
FORECASTING
Improved budgeting, helps managers anticipate
changes in the economy and therefore adjust
budgets accordingly.
BENEFITS OF SALES
FORECASTING
Essentially, the benefits
of sales forecasting
should help managers to
have better control.
SEASONAL VARIATIONS
Periodic fluctuations in sales revenues over a
specified time period such as months or quarters of
the year.
Example: Ice cream sales through the year.
CYCLICAL VARIATION
Recurrent fluctuations in sales linked to the economic
cycle of booms and slumps.
Unlike seasonal variations, cyclical variations can last
longer than a year.
RANDOM VARIATIONS
Unpredictable fluctuations in sales revenues caused
by erratic irregular factors that cannot be practically
anticipated.
EXTRAPOLATION
Forecasting technique that identifies the trend by
using past data and extending this trend to predict
future sales.
For example, if a firm’s sale revenue have increased
by an average of 5% each year for the past several
years
It might be expected that this trend continues in the
near future.
EXTRAPOLATION
MOVING AVERAGES
Method used to establish underlying trends by
smoothing out variations in the data set that are
caused by seasonal, cyclical and random variations.
VIDEO OF SALES
•
FORECASTING
Benefits of sales
forecasting
• Exercise of 4 point
moving average with
extrapolation
• Limitations of sales
forecasting
DEVENDAR RAWAT
CLOTHING LTD EXAMPLE.
Sales ($)
Month 1 100 000
Calculate a ‘three year moving
average’ for Devander Rawat Month 2 110 000
Clothing Ltd
Month 3 120 000
Month 4 95 000
Month 5 130 000
Total 555 000
STEP 1
Sales ($)
Work out the mean Month 1 100 000
for the first three Month 2 110 000
data items
Month 3 120 000
Month 4 95 000
Month 5 130 000
(100 000 + 110 000 + 120 000) / 3 = $110
000
Total 555 000
STEP 2
Sales ($) 3 point
moving
average
Add the column of
3 point moving Month 1 100 000
averages Month 2 110 000 110 000
Month 3 120 000
Month 4 95 000
Month 5 130 000
Total 555 000
STEP 3
Sales
Sales ($)
($) 3
3 point
point
moving
moving
average
average
Continue the
process for the rest Month
Month 11 100
100 000
000
of the periods Month
Month 22 110
110 000
000 110
110 000
000
Month
Month 33 120
120 000
000 108 333
Month
Month 44 95
95 000
000 115 000
Month
Month 55 130
130 000
000
Total
Total 555
555 000
000
TO CALCULATE VARIATION
Sales ($) 3 point moving Variation
average (actual -
Subtract trend)
the Month 1 100 000
forecasted
Month 2 110 000 110 000 0
result to
the actual Month 3 120 000 108 333 +11 667
sales Month 4 95 000 115 000 -20 000
number
Month 5 130 000
Total 555 000
4 POINT MOVING AVERAGE
The same technique is used (as in 3 point moving
average), although centering is used to average two
moving averages.
The first 4 point moving average is found by the sum
of the sales in the first 4 months divided by 4
months.
4 POINT MOVING AVERAGE
Sales ($)
Step 1 Month 1 100 000
Month 2 110 000
The sum of the first 4
Month 3 120 000
months ($425 000) divided
by 4 months. Month 4 95 000
$106 250 Month 5 130 000
Total 555 000
Sales ($) 4 point moving average Centered trend Variation ($)
Month 1 100 000
Month 2 110 000
106 250
Month 3 120 000 110 000 +10 000
Month 4 95 000 115 625 -20 625
Month 5 130 000 118 500 +11 500
Month 6 125 000
Month 7 128 000
STEP 2
Repeat the calculation for the rest of the months
Sales ($) 4 point moving average Centered trend Variation ($)
Month 1 100 000
Month 2 110 000
106 250
Month 3 120 000 110 000 +10 000
113 750
Month 4 95 000 115 625 -20 625
117 500
Month 5 130 000 118 500 +11 500
119 500
Month 6 125 000
Month 7 128 000
TO CALCULATE VARIATION IN
4 POINT MOVING AVERAGE
We create a column for a centered trend, which is
found by average two 4 point moving averages.
From this centered figure, it is possible to work out
variation in month 3.
Sales ($) 4 point moving average Centered trend Variation ($)
Month 1 100 000
Month 2 110 000
106 250
Month 3 120 000 110 000 +10 000
113 750
Month 4 95 000 115 625 -20 625
117 500
Month 5 130 000 118 500 +11 500
119 500
Month 6 125 000
Month 7 128 000
WITH THE CENTERED
TREND/TENDENCIA CENTRAL
We subtract the centered trend to the actual number
and the variation is obtained.
Sales ($) 4 point moving average Centered trend Variation ($)
Month 1 100 000
Month 2 110 000
106 250
Month 3 120 000 110 000 +10 000
113 750
Month 4 95 000 115 625 -20 625
117 500
Month 5 130 000 118 500 +11 500
119 500
Month 6 125 000
Month 7 128 000
WHAT IS THE AVERAGE
SEASONAL VARIATION?
The average seasonal variations of each specific
period, when applicable (when you have Q1, Q2, Q3
or more periods that are repeated more than once a
year).
It is useful to get a more realistic forecast, since
extrapolation smoothens real variations.
After forecasting the possible sales, the result can be
adjusted with the average seasonal variation.
HOW TO CALCULATE THE
ASV?
After calculating the seasonal variation of each
period, you calculate the average of each
repeated period.
For example: (2011(Q1)+2012(Q1)+2013(Q1) / 3)
= Average Seasonal Variation of Q1.
The same average seasonal variation will be used
in all Q1 periods.
The same steps are repeated with the rest of the
periods that we have information. (Q2, Q3, Q4,
etc..)
THANK YOU!
