The key input to the short-term financial planning process is the firm’s sales forecast. This prediction of the firm’s sales over a given period is ordinarily prepared by the marketing department.
On the basis of the sales forecast, the financial manager estimates the monthly cash flows that will result from projected sales and from outlays related to production, inventory, and sales. The manager also determines the level of fixed assets required and the amount of financing, if any, needed to support the forecast level of sales and production.
In practice, obtaining good data is the most difficult aspect of forecasting. The sales forecast may be based on an analysis of external data, internal data, or a combination of the two.
An external forecast is based on the relationships observed between the firm’s sales and certain key external economic indicators such as the gross domestic product (GDP), new housing starts, consumer confidence, and disposable personal income.
Forecasts containing these indicators are readily available. Internal forecasts are based on a consensus of sales forecasts through the firm’s own sales channels. Typically, the firm’s salespeople in the field are asked to estimate how many units of each type of product they expect to sell in the coming year.
These forecasts are collected and totaled by the sales manager, who may adjust the figures using knowledge of specific markets or of the salesperson’s forecasting ability. Finally, adjustments may be made for additional internal factors, such as production capabilities.
Firms generally use a combination of external and internal forecast data to make the final sales forecast. The internal data provide insight into sales expectations, and the external data provide a means of adjusting these expectations to take into account general economic factors. The nature of the firm’s product also often affects the mix and types of forecasting methods used.
No comments:
Post a Comment