STRATEGIC FINANCIAL

MANAGEMENT
Lesson 4
SALES FORECASTING

 Sales forecasting is the process of predicting future sales

levels by volume or value and future trends
 Quantitative sales forecasting is based on data which can
be historic or the result of quantitative research
 Sales forecasting will be used to:
 Inform resource management about inventory levels,
production output and logistics
 Inform cash flows and budgets
 Aid workforce planning

2
TIME-SERIES ANALYSIS
 Time-series analysis shows past sales figures in date order
 Marketers use this historical data, after fluctuations have been
smoothed out, to identify trends
 Trends are then used to predict future sales

3
COMPONENTS OF TIME SERIES ANALYSIS
 Trend
 Seasonal fluctuations
 Cyclic fluctuations
 Random fluctuations

4
MOVING AVERAGE
 Shows whether a trend is significant by smoothing out fluctuations
in data
 Allows for better identification of an overall trend
 Identifies influencing factors on future sales e.g. seasonal, cyclical
or random fluctuations
 Sufficient data is needed to give validity to the trend identified

5
 CALCULATING MOVING AVERAGES
Month Sales 3 period moving
£m average
Jan 10
Feb 14 12 10+14+12 = 36
Mar 12 11.67 36/3 = 12
Apr 9 10.67
14+12+9 = 35
May 11
35/3 = 11.67
June 13
July 12 Show how this figure
August 11 was calculated
Calculate the next two moving averages.
Plot a graph to show both the quarter figures and
the moving average figures. 6
CALCULATING MOVING AVERAGES
Year / Sales £m 4 quarter moving average
Quarter
2015/Q1 10
10+14+12+9 = 45
2015/Q2 14 11.2
45/4 = 11.25
2015/Q3 12
Note the answer is centred.
2015/Q4 9
2016/Q1 11
2016/Q2 13
2016/Q3 12
2016/Q4 11

Complete the table.

Plot a graph to show both the quarter figures and the moving 7
EXTRAPOLATION
 Using past data to extend an identified trend into the future
 A general slow upward trend has been identified and from this yr 6
and 7 have been extrapolated

8
INTERPRETATION OF SCATTER GRAPHS
 Scatter graphs plot the relationship between 2 variables to identify correlation
 Correlation is the identifying of a relationship between 2 variables
 E.g. marketing budget and sales
 Correlation can be:
 Positive
 the 2 variables move in the same direction
 e.g. as temperature goes up ice cream sales go up
 Negative
 the 2 variables move in opposite directions
 e.g. as road tax prices go up the sales of new 4 x 4s goes down
 Zero
 there is no relationship between the factors
 e.g. average rain fall and sales of text books
9
LIMITATIONS OF QUANTITATIVE SALES FORECASTING
TECHNIQUES
 The further into the future the greater the uncertainty
 Sales will be influenced by external influences which
are difficult to accurately predict
 The past is not always a fair indication of the future
 May be manipulated or biased
 Inadequate market research
 Unexpected events

10
DECISION MAKING
 Dr John Pemberton, a pharmacist from Atlanta, invented a carbonated drink in 1886
 The drink Coca Cola sold an average of 9 units a day and at the end of the first year had
generated $50 in revenue
 Achieving these sales had however cost Dr Pemberton $70
 In 1887 fellow pharmacist and businessman Asa Candler bought the formula for Coca
Cola off Dr Pemberton
 Dr Pemberton was offered two options, either a lump sum payment of $2300 or 1 cent
per bottle sold
 He accepted the lump sum of $2300
 It is estimated that if he took $1c per bottle his descendants would now earn per
annum a sum similar to the GDP of Belgium

11
DECISION TREE
 A simple and visual way of presenting the alternative course of action
available when making a decision
 A mathematical model based on logic and probability
 Decision trees identify:
 When a decision has to be made
 The choices available
 The cost associated with each option
 The possible outcomes related to each choice
 The likelihood (probability) of each outcome occurring
 The estimated financial result of each outcome

12
DECISION TREE
Decision trees are drawn using the following tools:
 A decision node – this is used where a decision has to be
made i.e. the option with the lowest financial outcome is
discarded at this point and the highest financial outcome
shown in the box
 A chance node - this is used where there are a number of
possible outcomes. A calculation is carried out here to
work out the expected value
 A line is used to show the options and the possible
outcomes

13
A CLOTHING MANUFACTURER CAN EITHER IMPORT THEIR RAW MATERIALS
FROM ABROAD OR BUY FROM LOCAL SUPPLIERS
Options Cost Success Failure
Probability Financial outcome Probability Financial outcome
Buy local £5000 50% £15000 50% £6000
Import £4000 70% £20000 30% - £5000
What does this tell us?
• If the manufacturer chooses to buy their materials from a local supplier it will cost
£5000
• If this is successful the financial outcome will be £15000, but there is only a 50%
chance of success
• If this is not successful the financial outcome will only be £6000, there is a 50%
chance of failure
• Explain what the table tells us about the option to import

14
A CLOTHING MANUFACTURER CAN EITHER IMPORT THEIR RAW MATERIALS
FROM ABROAD OR BUY FROM LOCAL SUPPLIERS
Options Cost Success Failure
Probability Financial outcome Probability Financial outcome
Buy local £5000 50% £15000 50% £6000
Import £4000 70% £20000 30% - £5000

 Why do both probabilities add up to 100%?

 What is each probability expressed as a decimal?

 50%
 70%
 30%

 Can the probability of an outcome ever be 1?

15
DRAWING A DECISION TREE – LEFT TO RIGHT
Success
£15000
Buy local 0.5
Failure
£5000 £6000
0.5

Success
£20000
Import
0.7
£4000 Failure
- £5000
0.3
Do nothing
£0
THE CALCULATIONS
 Calculate from right to left
 First calculate the expected value
 Multiply the financial outcome by the probability for each chance
 Add the results together
 Buy local
 Success = £15000 x 0.5 = £7500
 Failure = £6000 x 0.5 = £3000
 Expected value = £10500
THE CALCULATIONS
 First calculate the expected value
 Multiply the financial outcome by the probability for each chance
 Add the results together
 Import
 Success = £20000 x 0.7 = £14000
 Failure = - £5000 x 0.3 = -£1500
 Expected value = £12500
 The expected values are shown in the chance nodes (the circles)
THE CALCULATIONS
 Second calculate the net gain
 Subtract the cost from the expected value
 Buy local
 Expected value = £10500
 Cost = £5000
 Net gain = £5500
 Import
 Expected value = £12500
 Cost = £4000
 Net gain = £8500
 The highest net gain is shown in the decision nodes (the square) and the other
options crossed off with a single line
THE CALCULATIONS
 Calculate from right to left

Subtract Add Multiply

 First calculate the expected value

 Multiply the financial outcome by the probability for each chance
 Add the results together
 Second calculate the net gain
 Subtract the cost from the expected value
 SHOWING THE CALCULATIONS ON A DECISION TREE
EV = £10500 Success
£15000
Buy local 0.5
Failure
NG = £5500 £5000 £6000
0.5
EV = £12500
Success
Import £20000
NG = 0.7
£8500 Failure
- £5000
£4000 0.3
Do nothing
£0
Based on the decision tree the business should import the raw materials as the net gain is £8500 which is £3000 higher than if they chose
to buy from a local supplier.
QUANTITATIVE VS QUALITATIVE FACTORS

 Based on quantitative factors the business should choose to import raw

materials rather than buy local
 In pairs write a list of qualitative factors that should also be considered
USE AND VALUE OF DECISION TREES
Strengths Weaknesses
• Clearly show the options available • Relies heavily on estimates i.e. probabilities
• Encourages logical thinking and financial outcomes

• Allows structured discussions and • Doesn’t take into account qualitative factors
comparisons • Estimates may be biased
• Takes into account risk • May not consider external influences e.g. if
• May raise alternative options the cost of one option is substantially higher
will this be affected by interest rates
• Quantifies the outcome of each decision
• Non dynamic – may be out of date before a
• Highlights the likelihood of each decision is reached
outcome
CRITICAL PATH ANALYSIS
 Critical path analysis is a technique used to identify the order in
which all activities need to be completed when planning a
complex project.
 Critical path diagrams organise the activities in an order to show
which activities can be done simultaneously and which are
dependent upon earlier activities.
 This allows for the identification of the shortest time in which a
project can be completed.
 The critical path is the set of activities that will lengthen the
duration of the project if delayed.

24
CRITICAL PATH DIAGRAMS
• A network diagram is made up of nodes
• Each node is split into 3 parts
The earliest start time
(EST) - the earliest the
following activity can
possibly start.
The node
number, based
upon the order
The latest finish time (LFT) –
in which it is
the latest an activity can
drawn. finish without delaying the
whole project.
CRITICAL PATH DIAGRAMS
 Each activity is shown on a line that connects the nodes
 The activity letter is shown above the line
 The activity duration is shown below the line
 Here activity A takes 4 weeks

4
 COMPLETING A CRITICAL PATH DIAGRAM
9 E
D 3
3
5
4 C H
A 2 6 7
10 5
0 4
1 1) Node 1 always starts at 0
G 2) EST is calculated from left to right by
B 8 adding the duration of the activity to
7 the previous EST i.e. node 2 is 0 + 4 =
7 F 4. Node 3 is 4 + 5 = 9.
4 5 3) Complete the EST for activity F only.
4
 COMPLETING A CRITICAL PATH DIAGRAM
9
E
D 3
3
4 5 H
C 19
A 2 6 7
10 5

0 4
1
G 4) The EST for activity F is 7 + 4 = 11.
B 8 5) When two or more activities go into the
same node the highest number goes in the EST
7 section.
7 F 11
4 5 6) Node 6 therefore has two paths leading to it
4 – from activity C 4 + 10 = 14, from activity G 11
+ 8 = 19. Therefore 19 goes in node 6.
7) Fill in the EST for node 7.
 COMPLETING A CRITICAL PATH DIAGRAM
9 E
D 3
3
5
4 C 19 H 24
A 2 6 7
10 19 5 24
0 4
1
G 8) Node 7 – Activity E 9 + 3 = 12, activity H 19 +
B 8 5 = 24. Therefore 24 goes in node 7.
7 9) The LFT of the final node always matches the
7 F 11 EST. Therefore node 7 the LFT is 24.
4 5 10) To complete the LFT you calculate from
4
right to left. 24 – 5 duration of activity H = 19.
11) Calculate the LFT for nodes 3, 5 and 7.
 COMPLETING A CRITICAL PATH DIAGRAM
9 E
D 3
21
3
5 H 24
4 C 19
A 2 6 7
9 10 19 5 24
0 4
1 12) Node 5 19 – 8 = 11. Node 4 11 – 4 = 7. Node
G 3 24 – 3 = 21.
B 8 13) When two or more activities go into the
7 same node the lowest number goes in the LFT
7 F 11 section.
4 5 14) Node 2 activity D 21 – 5 = 16, activity C 19 –
7 4 11 10 = 9. Therefore 9 goes in node 2.
15) Fill in the LFT on node 1.
 COMPLETING A CRITICAL PATH DIAGRAM
9 E
D 3
21
3
5 H 24
4 C 19
A 2 6 7
9 10 19 5 24
0
1
0 G 16) Node 1 will always have an EST of 0 and
B 8 an LFT of 0.
17) Mark on the critical path – the path
7 taken where EST = LFT.
7 F 11
4 5 18) The critical path is BFGH. If any of the
7 4 11 activities along this path are delayed the
whole project will be delayed.
CRITICAL PATH ANALYSIS – THE RULES
 Each line represents an activity
 ESTs are calculated from left to right by adding the duration to the previous EST
 If more than one activity precedes a node the highest figure becomes the EST
 LFTs are calculated from right to left by subtracting the duration from the
previous LFT
 If more than one activity precedes a node the lowest figure becomes the LFT
 The first node will always have an EST and LFT of zero
 The final node will always have an EST and LFT that is the same figure
 A node preceding an activity that is on the critical path will always have an EST
and LFT that is the same
 The critical path are those activities that must be completed on time if the whole
activity is not to be delayed. These are identified by putting a line through the
activity.
LIMITATIONS OF USING CRITICAL PATH ANALYSIS
 Is only a starting point for a successful project
 Can not stop unexpected delays from happening
 Relies on estimations of the duration of each activity
 Does not take into account external influences
 May encourage inefficient behaviour on non critical
activities
 Large projects can be too complex for CPA
 SOURCES OF FINANCE

Internal sources of finance

External sources of finance
Short term sources of finance
Long term sources of finance

Prepared by Zohaib Akram 34

 INTERNAL SOURCES OF FINANCE

Personal savings
Retained profit
Selling assets

Prepared by Zohaib Akram 35

 EXTERNAL SOURCES OF FINANCE
Bank overdraft
Trade payables
Credit cards
Loan capital
Unsecure bank loans
Mortgage
Debenture
Hire purchase
Share capital
Venture capital
Crowd Funding
Prepared by Zohaib Akram 36
Q&A