Developing pro forma financial statements and cash flow forecasts depends heavil

Question

Developing pro forma financial statements and cash flow forecasts depends heavily upon sales forecasts. Imagine you are a financial analyst working for a major stockbroker, and you are trying to develop a one-year sales forecast for a major national department store. List five pieces of information you want to obtain to aid you in your forecast, and explain why they will aid you in your forecast.

Now that you have made your best prediction of next year's sales, you will want to estimate next year's cost of goods sold. Pick two pieces of information you definitely want to obtain in order to help you with this task, and explain why they will be helpful.

Explanation / Answer

Ans:

Five pieces of information you want to obtain to aid your forecast:

1.      A basic for the sale forecasting: Sales forecasts enable you to manage your business more effectively. Before you begin, there are new questions that may help clarify your positions.

How many new customers do you gain each year?

How many customers do you lose each year?

What is the average level of sales you make to each customer?

Are there particular months where you acquire or lose more customers than usual?

2.      Your sales assumption: Every year is different so you need to list any changing circumstances that could significantly affect your sales.

The market:

·         The market you sell into will grow by 2 per cent.

·         Your market share will shrink by 2 per cent, due to the success of a competitor.

Your resources:

·         You will double your sales force from three people to six people, halfway through the year.

·         You will spend 50 per cent less on advertising, which will reduce the number of enquiries from potential customers.

Overcoming barriers to sale:

·         You are moving to a better location, which will lead to 30 per cent more customers buying next year.

·         You are raising prices by 10 per cent, which will reduce the volume of products sold by 5 per cent but result in a 4.5 per cent increase in overall revenue.

3.      Developing your forecasting: You need to create your sales forecast. This becomes easy once you've found a way to break the forecast down into individual items.

·         Can you break down your sales by product, market, or geographic region?

·         Are individual customers important enough to your business to warrant their own individual sales forecast?

·         Can you estimate the conversion rate - the percentage chance of the sale happening - for each item on your sales forecast?

5.      Creating a sales plan: The questions you should answer in your sales plan are:

·         What are you going to focus on?

·         What are you going to change?

·         In practical terms, what steps are involved?

·         What territories and targets are you going to give each salesperson or team?

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