Factors Affecting Sales Forecasting

Financial Planning and Budgeting

• Financial planning involves considering proposed outlays for fixed assets, research and development activities, marketing and product development actions, capital structure, and major sources of financing.
• It also includes termination of existing projects, product lines, or lines of business, repayment or retirement of outstanding debts, and any planned acquisitions.

Short-term Financial Plans

• Short-term financial plans include setting sales forecasts and other forms of operating and financial data.
• This translates into operating budgets, cash budgets, and pro forma financial statements.

Budget Preparation

• Budget preparation involves:
  • Sales budget
  • Production budget
  • Operating budget
  • Cash budget

Sales Budget

• The sales budget is the most important account in making a forecast, as most expenses are correlated with sales.
• The financial manager must support the sales forecast with reasonable assumptions.

Projected Financial Statements

• Projected financial statements are a tool for setting an overall goal of what the company's performance and position will be for and as of the end of the year.
• They set targets to control and monitor the activities of the company.
• Projected financial statements include:
  • Projected Income Statement
  • Projected Statement of Financial Position
  • Projected Statement of Cash Flows

Steps on Financial Statement Projection (Projected Income Statement)

• Forecast sales based on the assessment of external and internal factors related to the company and historical growth.
• Forecast cost of sales and operating expenses by identifying variable and fixed costs.

Forecasting Cost of Sales and Operating Expenses

• Cost of sales are direct costs associated with the generation of sales.
• Operating costs are a mix of variable and fixed costs.
• External and internal factors should be considered in forecasting sales, including:
  • GDP growth rate
  • Interest rate
  • Foreign exchange rate
  • Income tax rates
  • Inflation
  • Competition
  • Economic crisis
  • Regulatory environment
  • Political crisis
  • Internal factors such as pricing, promotion activities, distribution, area/outlet coverage, production capacity, human resources, management style, reputation, and network of the controlling stockholders and financial resources.

Production Budget

• A production budget provides information regarding the number of units that should be produced over a given accounting period based on expected sales and targeted level of ending inventories.
• It is computed as: Required production in units = Expected Sales + Target Ending Inventories - Beginning Inventories.