Question

Sales Forecast

Almost all financial plans require an externally supplied sales forecast. In our models that follow, for example, the sales forecast will be the “driver,” meaning that the user of the planning model will supply this value, and most other values will be calculated based on it. This arrangement is common for many types of business; planning will focus on projected future sales and the assets and financing needed to support those sales. Frequently, the sales forecast will be given as the growth rate in sales rather than as an explicit sales figure. These two approaches are essentially the same because we can calculate projected sales once we know the growth rate. Perfect sales forecasts are not possible, of course, because sales depend on the uncertain future state of the economy. To help a firm come up with its projections, some businesses specialize in macroeconomic and industry projections.

Why do you think most long-term financial planning begins with sales forecasts? Put differently, why are future sales the key input?

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Answer 1

Most long-term financial planning will be beginning with the sales forecast because sales forecast will be providing an idea about the revenue generation of the company and sustainability of the company in the long run and it will also provide an idea about the ability of the company to extract maximum sales out of its asset utilisation so it will be reflecting the part of efficiency of the company in order to generate higher amount of sales by proper and optimum utilisation of its assets.

Revenues are also providing us about an idea of the utilisation of the cash and the other current as well as fixed assets of the company and it is giving us a wide perspective of the performance of the company so the overall highest amount the firm can earn is revenue so all the cost has to be adjusted with revenue and hence it can be said that the sales forecasts are the most important factor to be included in the long term planning process and they will provide about the sustainability of the company and the income generation capacity of the company and the ability of the company to compete in the market by generating sales.