Sales forecasting

Why forecast sales

• Production and inventory: how much to make and order.
• Staffing: how many workers and shifts are needed.
• Cash flow and budgets: cash inflows are built from forecast sales.
• Finance: lenders want to see realistic forecasts in a business plan.
• Marketing: setting targets and judging the success of campaigns.

Forecasts are usually based on past sales (extrapolating the trend), market research and managers' judgement.

Factors affecting forecasts

• Consumer trends: changes in tastes, fashion, health awareness, demographics and technology (such as the move to online shopping).
• Economic variables: income and employment, inflation, interest rates and exchange rates. Rising unemployment cuts demand for luxuries; higher interest rates hit goods bought on credit.
• Actions of competitors: price cuts, new products, entry of new firms or closure of rivals.

Difficulties

• The future may not follow the past: shocks such as a pandemic, a new competitor or a sudden recession break trends.
• New products have no sales history.
• Market research may be biased or based on a small sample.
• Managers can be over-optimistic, especially when seeking finance.
• The further ahead the forecast, the less reliable it is.

Overestimating sales is listed in the specification as an internal cause of business failure, because the firm may over-produce and run short of cash.

Worked example

Quarterly sales were 400, 440, 470 and 520 units. Find the average quarterly increase and use it to forecast the next quarter.

1. Total increase from Q1 to Q4 = 520 - 400 = 120 over 3 changes
2. Average increase = 120 / 3 = 40 units
3. Forecast = 520 + 40 = 560 units

Answer: About 560 units, assuming the trend continues.

Check yourself

1. Monthly sales were 1,200, 1,260, 1,330 and 1,380 units. Using the average monthly increase, forecast sales for the next month.
   Show answer

   1440 units. Average increase = (1,380 - 1,200) / 3 = 60; forecast = 1,380 + 60 = 1,440 units.

2. Sales this year were $250,000. Managers forecast growth of 8%. What is the sales forecast for next year?
   Show answer

   $270000. 250,000 x 1.08 = $270,000.

3. A firm forecast sales of 5,000 units; actual sales were 4,400. By what percentage of actual sales did the forecast overestimate them? Give your answer to 1 decimal place.
   Show answer

   13.6 %. (5,000 - 4,400) / 4,400 x 100 = 13.6%.

4. Which is an economic variable that could affect a sales forecast?
   • A change in a competitor's logo
   • A new company director
   • A rise in interest rates
   • A switch to a different supplier of stationery
   Show answer

   A rise in interest rates. Interest rates affect spending, especially on credit.

5. Why is forecasting particularly difficult for a new product?
   • There are no past sales data to base it on
   • Competitors must approve it
   • Prices cannot be set
   • Interest rates are fixed
   Show answer

   There are no past sales data to base it on. Extrapolation needs a history.

6. Which plan depends most directly on the sales forecast?
   • The company's legal form
   • The deed of partnership
   • The cash-flow forecast
   • The choice of company name
   Show answer

   The cash-flow forecast. Cash inflows come from forecast sales.

7. Which is an example of a consumer trend affecting forecasts?
   • Growing demand for plant-based food
   • A rise in the exchange rate
   • A competitor opening a new store
   • A fall in the rate of inflation
   Show answer

   Growing demand for plant-based food. Changing tastes are consumer trends; the others are economic variables or competitor actions.

8. Explain one reason why sales forecasts may be inaccurate.
   Show answer

   Unexpected changes such as a new competitor, a recession or a shift in consumer tastes mean the future does not follow past trends.. Any developed reason: shocks, competitors, economic change, changing tastes, bias, no past data.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson qualifications: Edexcel International Advanced Level Business (2018)

Last updated 8 November 2026. Spotted a mistake? Tell us.