The forecasting process aims to estimate the quantities and values of all the products or services a firm is expected to produce and sell in a set period.
The process may be based on:
- Market potential: the maximum possible sales under ideal conditions if all avenues are pursued.
- Sales forecast: the number of sales estimated under the specific marketing plan of the firm given the firm’s production capacity.
The forecasting process may be costly and time-consuming, and organisations must balance the cost of generating forecasts against the need to obtain more accurate results.1
Methods to develop sales forecasts can be categorised into qualitative and quantitative factors. Qualitative methods of forecasting are based on subjective judgment, opinion and the experience of staff and managers and include:2
The technique assumes that several experts can arrive at a better forecast than one person. There is no secrecy, and communication is encouraged. The forecasts are sometimes influenced by social factors and may not reflect a true consensus.
A composite of individual sales staff estimates based on feedback from major clients or their own experience and judgment. Regional managers combine district forecasts and forward them to head office.
An alternative method of obtaining a consensus opinion of experts is achieved through a series of questionnaires rather than face-to-face meetings. In this method, a panel of experts is interrogated by a sequence of questionnaires in which the responses to one questionnaire are used to produce the next questionnaire. Any set of information available to some experts and not others is thus passed on to the others, enabling all the experts to have access to all the information for forecasting. Moreover, this technique eliminates the bandwagon effect of the majority opinion.
The systematic, formal, and conscious procedure for evolving and testing a hypothesis about real markets; existing and potential customers are surveyed to determine the type of products they intend to buy and in what quantities.
A prophecy that uses personal insights, judgment, and, when possible, facts about different future scenarios. It is characterised by subjective guesswork and imagination; generally, the methods used are non-scientific.
Historical analogy is a comparative analysis of the introduction and growth of similar new products that bases the forecast on similarity patterns.
Using Digital Technologies for research
Digital technologies are an integral part of our lives. We use them to access, extract and share information to achieve required outcomes. For accountants, this means they can use software like excel, MYOB and online services to help them with their calculations. Digital technologies can save time and ensure accuracy. Additionally, you can use online resources to research specific topics or find case studies to help problem-solve. In short, digital technologies provide many benefits for accounting professionals.
Finance is all about making predictions. Whether you are budgeting for the future or trying to figure out what a stock will do, being able to make an educated prediction is an essential part of the process.
Your projections are best informed by sound research. Unfortunately, we often see what we want to see and ignore information that doesn't fit our preconceptions. Our cognitive abilities can also limit us. We can only process so much information at once, and we often rely on cognitive shortcuts (or heuristics) to make decisions. Unfortunately, these shortcuts can lead us astray if they are not based on accurate information. The following research steps will help you to make accurate predictions and create a budget that reflects your current and future financial status.
- Gather as much information as possible, including recent financial statements, past tax returns, credit reports, news reports, other business intelligence, and other related documentation.
- Analyse the data that you have collected. Look for trends and patterns in your income, expenses, and debts.
- Make predictions based on the data that you have analysed. Then, use your findings to estimate future income, expenses, and debt levels.
- Use your predictions to create realistic goals for the organisations your work with and make plans to achieve them.
Based on the budget prepared for the small regional retail store earlier in (Section 2.1), and using qualitative methods, national forecasts can be prepared; this can be achieved by having each local or State manager review the sales for the previous three (3) years and sending estimates to the national manager as follows:
| Product: Clothing | |
|---|---|
| Vic $ | 300,000 |
| Tas $ | 250,000 |
| NSW $ | 650,000 |
| ACT $ | 300,000 |
| Qld $ | 450,000 |
| NT $ | 250,000 |
| WA $ | 400,000 |
| SA $ | 350,000 |
| National $ | 2,950,000 |
Table 4: Example of market research by State
Quantitative methods involve the use of mathematical modelling, which can be produced by specialised computer software or the use of spreadsheets. This method is appropriate if market forces are relatively stable and sales patterns and trends are not likely to change in the future.2
Quantitative methods include:2
Statistical techniques are applied to historical sales data to predict the sales trend for the coming period using the least squares method.
Based on cause and effect with the assumption that if key causal variables are known, sales levels can be forecasted. Casual models use linear regression and correlation.
Each point of a moving average of a time series is the arithmetic or weighted average of a number of consecutive points of the series, where the number of data points is chosen so that the effects of seasonals or irregularity or both are eliminated.
This technique is similar to the moving average, except that more recent data points are given more weight. Descriptively, the new forecast equals the old one plus some proportion of the past forecasting error. Adaptive forecasting is somewhat the same, except that seasonals are also computed.
Example:
The following sales were recorded for the years 2009 to 2012
| A | B | |
|---|---|---|
| 1 | 350,000 | 2009 |
| 2 | 384,000 | 2010 |
| 3 | 401,000 | 2011 |
| 4 | 410,000 | 2012 |
| 5 | 2013 |
Using the Excel statistical function, “Trend” sales can be predicted for the year 2013. Create the table above in an excel spreadsheet and insert the data into cells A1 through to B5 as above. In a separate cell, create the following formula and press “Enter”:
=TREND (A1: A4, B1: B4, B5: B6, TRUE)
Sales for 2013 are predicted to be $435,500
The formula can be modified to include further years and figures as required.
Example 1: Quantitative method of calculating sales
Irrespective of whether qualitative or quantitative methods are used, controllable and uncontrollable internal and external factors will impact the assumptions on which the forecast is based.
Controllable factors may include:
Uncontrollable factors include:1
Businesses typically use statistical analysis when forecasting and analysing trends in the market. Statistical analysis involves collecting information needed by the business to report the trends. It follows the following principles:
- Describes the nature of the data to be analysed
- Explores the relationship of the data to the sample population
- Creates a model to show the relationship of the data to the sample population
- Validates the model of the relationship between variables
- Allows prediction of a situation or trend that is most likely to occur in the future, thus, guiding future actions
Using your current work environment, or one you have recently worked in, think about how you satisfy the requirements of the Australian Government’s Corporations Act 2001, its regulations, and the requirements of the regulator, the Australian Securities and Investments Commission. Make and keep notes for your future reference, as this information will support your assessment and professional practice.
Visit the website of the Australian government Australian accounting Standards Board (AASB), and take note of the AASB standards for your records. Ensure you add your email address so that you will receive updates as they are issued.
- Reflect on how following the standards in your work budgeting and forecasting for organisations will help you and your clients comply with legislation. Read the following web page from Chartered Accountants Australia and New Zealand (CA ANZ), and reflect on how members in Australia are expected to observe the Australian Professional and Ethical Standards Board (APES) 110 – Code of Ethics for Accounting Professionals.
- Review the five fundamental principles in the ESBA Code of Ethics that govern the ethical conduct of professional accountants and, in your own words, define how they might to your professional practice preparing budgets and forecasts for organisations.
- Integrity
- Objectivity
- Professional Behaviour
- Confidentiality
- Professional Competence and Due Care
