Free Essay On Sales Forecasting And Budgeting
There are a number of forecasting methods that can be used for purposes of coming up with sales and/or budgeting estimates. In question the methods that will be used are, simple moving average, 3 year weighted average, five year weighted average and five year exponentially smoothed weighted average.
Simple moving average.
In this forecasting method all the prior data is assigned equal weights (Lucey, 2002, pp.231). For this method the entire historical data is used and each year assigned a weight of one. The sum of the weight will thus be 10. Using this method the forecast for 2010 is calculated as follows:
[900+1400+1750+1900+1700+1500+2000+1950+2250+2300]/10 = 17650/10 =1765
Thus the sales forecast for year 2010 using this method is 1765.
Three year moving average.
This method uses the data for on the previous three years with the highest weight of 3 assigned to 2009 data. The data for years 2008 and 2007 are assigned weight of 2 and 1 respectively. The sum of the weights is thus 3+2+1 = 6.
Thus using this method the sales forecast for 2010 is calculated as;
2010 forecast= 2300×3+2250×2+1950×16 = 2225
Thus using this method gives a sales estimate of 2225 for the year 2010.
Five year weighted average.
This method uses data for the previous five years with the greatest weigh of 5 being assigned to the most recent data of year 2009. The data for the other years 2008, 2007, 2006 and 2005 are assigned weight 4, 3, 2, and 1 respectively. The sum of the weights is thus calculated as 5+4+3+2+1 = 15
The sales forecast for the year 2010 using this method is thus calculated by;
Thus the 2010 sales forecast using this method is 2123.
Five year exponentially smoothed weighted average.
In exponential smoothing the weights for the previous years are exponentially reduced using a smoothing factor α. Assuming an smoothing factor of 0.6, the sales forecast for the year 2010 will be calculated as follows
Thus if the smoothing factor is 0.6, the 2010 sales estimate using five year exponentially smoothed weighted average is 2207
Most Accurate Forecasting method.
Given the actual 2010 sales to be 2500, the three point estate gives the most accurate estimate. This is because of the four methods used it gives the sales forecast with the least variance from the actual data.
Lucey, T. Quantitative Techniques. London: Continuum, 2002.pp.231 Print.
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