The benefits of sales forecasting include:

• Sales forecasting can drive strategic planning in a business. For example, it can use sales forecasts to make more informed decisions about growth and expansion plans.

• It enables organizations to predict, identify, and prepare for likely opportunities and threats, such as cyclical and seasonal variations.

• It helps firms to plan for the future, and to minimise uncertainties (risks) of the future. For example, if the sales forecast for a particular product is extremely pessimistic, the business may decide to withdraw the product before it becomes a drain on resources and finances.

• Sales forecasts help businesses to identify sales trends, which helps to improve its operational efficiency. For example, more people can be hired prior to peak trading seasons, improve its stock control and have better cash flow management. By contrast, optimistic, but realistic, forecasts can help the business to secure external sources of finance.

• Learning from the past can strengthen an organization. Looking at what has happened in the past can help organizations to predict what is likely to happen in the future, thereby strengthening the organization and helping it to be more successful.

Forecasts are not perfect, but provide useful information for planners

Note: Although sales forecasting is a quantitative tool, the organizational culture or the sub-culture of the sales department can have a direct impact on sales forecasting.

The limitations of sales forecasting include:

• Past data and sales trends are not indicative of the future. Extrapolated results can be inaccurate as they ignore changes in the external business environment.

• Sales forecasts are less accurate the longer the time period under consideration, which raises the question about the usefulness of this quantitative tool.

• Realistic and reliable sales forecasts depend on the ability to collect accurate market research data, but this can be time consuming and expensive to collect.

• Sales forecasting has limited use for some businesses, such product-orientated organizations (which do not rely on market research to sell their products), those in rapidly changing markets (such as the fashion industry) and new businesses (which have no previous sales data to draw upon).

• Qualitative factors that affect sales revenues are largely ignored. Examples of qualitative methods that can influence sales forecasts include consumer panels and focus groups. Qualitative factors also include external factors such as the degree of political, economic, and social stability.

• Changes in the external business environment can cause large inconsistencies and inaccuracies in sales forecasts. For example, an unexpected downturn in the economy, which causes a major recession, will nullify optimistic sales forecasts.

• Similarly, the potential for random variations almost nullifies any effort spent on sales forecasting. Examples of such events include crises (such as a global financial crisis or the outbreak of infectious viruses such as the coronavirus pandemic) and natural disasters (such as earthquakes, extended periods of forest fires, or severe flooding).

Natural disasters, such as severe floods, can make sales forecasting rather pointless

Read more about the main types of variations by clicking the icon below.

• Correlation is a statistical technique that shows the relationship between two sets of numbers or variables, such as sales revenue at different times of the year.

• Cyclical variations are the recurring fluctuations in sales revenues due to the trade cycle (or business cycle).

• Random variations refer to variances in sales that can happen at any time and cause unusual data patterns.

• Sales forecasting is a quantitative technique used to predict a firm’s level of sales revenue over a given time period, such as per month, quarter, or year.

• Seasonal variations are foreseeable periodic fluctuations in sales revenues over a known period of time, such as certain months or times of the year.

Parx Clothing Co. Ltd. (PCC) is a clothing chain established in 1981. It is vertically integrated, with control of the entire chain of production from designing, manufacturing, and distribution of its clothing products to retail outlets. The company uses the finest quality materials.

PCC has its manufacturing base in Vietnam and has its sales network spread across the USA, India, UK, and Germany. The PCC brand is known for being trendy in the fashion industry as well as its international designs. PCC has new product launches twice a year. The first takes place in the February/March and second in September/October showcasing PPC’s latest fashion collections for the season.

The marketing director has created the following sales forecasts for the next twelve months, based on the company’s past data:

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Answers

(a)  Define the term sales forecasts.  [2 marks]

Sales forecasts are predictions of an organization’s sales volume or sales revenue over a given period of time, such as per quarter or year.

Award [1 mark] for a definition that shows limited understanding.

Award [2 marks] for a definition that shows good understanding, similar to the example above.

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(b)  Explain two possible economies of scale from that PCC is likely to have benefited from.  [2 marks]

Possible answers could include an explanation of:

• Purchasing economies of scale - Buying materials in bulk, including fabrics, buttons, labels, thread, stitching, and sewing needles. Unit costs of such materials will fall due to discounts offered by PCC’s suppliers for bulk purchases.
• Technical economies of scale - Investments in equipment and machinery used to produce the clothing items (such as CAD-CAM machinery, layer cutting machines, stitching machines etc.) in larger quantities. Over the long run, unit costs will fall as the scale of PCC’s production increases.
• Marketing economies of scale - As PCC sells and distributes its fashion products in the USA, India, UK, and Germany, it can benefit from lower unit costs of advertising and promotion perhaps through more effective international marketing media.
• Financial economies of scale - Increased amounts of finance, and at more affordable interest rates, can be made available to firms as they expand.
• Accept any other relevant answer.

Mark as 2 + 2.

For each answer, award [1 mark] for identifying a relevant economy of scale and [1 mark] for an appropriate explanation in the context of PCC.

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(c)  Outline one advantage and one disadvantage of using sales forecasting for PCC.  [4 marks]

Possible advantages could include:

• Sales forecasting helps to facilitate planning - Sales forecasting uses past and current data which can be used as a useful planning tool to reduce future uncertainties, such as purchase orders of fabrics. Researchers, such as the marketing director, can identify the trend based on a method of moving averages to forecast the sales figures in the future.

• Improved inventory control - Sales forecasting allows PCC to keep an appropriate level of stocks, such as fabrics, at different times of the year.

• Improved budgetary control - Sales forecasting allows various budgets to be better prepared for different functions within the organization. This could help PPC to improve its corporate strategies to achieve it business aims and objectives.

• Better cash flow position and improved working capital - Sales forecasting and improved budgetary control help PPC to identify seasonal fluctuations and such impacts on the firm’s liquidity position.

• Accept any other relevant explanation written in the context of the case study.

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Possible disadvantages or limitations could include:

• Limited and/or inaccurate information - Data is limited and does not necessarily indicate the whole picture for the company. For instance, the forecasts are based on the past, which maybe unrepresentative so the sales forecasts might be ineffective in practice.

• External influences - Changes in the external environment limits the usefulness of the sales forecasts prepared. For example, changes in economic conditions or consumer habits, taste and preferences will affect the demand for PCC’s fashion items.

• Accept any other relevant explanation written in the context of the case study.

Mark as 2 + 2.

Award [1 mark] for a relevant advantage and [1 mark] for a relevant disadvantage that is clearly identified, up to a maximum of [2 marks].

Award [1 mark] for each appropriate explanation / application, up to a maximum of [2 marks].

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This exam practice question was created by my IBEN colleague, Dr. Rima Puri, who is a highly experienced IB educator. She is a senior IB Examiner, Internal Assessment moderator, and an Extended Essay examiner for Business Management. Many thanks for sharing this on InThinking, Dr. Rima!

Teachers can download a PDF copy of the above exam practice question to use with your students by clicking the link here.