2.1.2 Visual representation of sales and budgets
Graphs can be used to estimate future sales. One type of graph that is used for this purpose is known as a Time Series Graph. This type of graph shows what has happened to sales, for example, over a period of time. The first step in producing a Time Series Graph is to gather sales figures up until the present and plot them on the graph. The next step is to join the different sales figures with a line, a bit like a dot-to-dot puzzle. If there are high points and low points it is a good idea to draw a line through the middle of the peaks and troughs. This is called a 'line of best fit' and provides an "average" of the figures. The line of best fit should also give you an indicator of where the sales figures are heading. In order to extend the line beyond the present you can extend or extrapolate the trend line beyond the known data to give us some indication of the situation in the future; as depicted below.
Annual Sales $'s K |
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160k |
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150k |
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Limit of actual data |
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Extrapolate |
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140k |
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130k |
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120k |
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110k |
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100k |
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90k |
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80k |
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70k |
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60k |
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Time Line |
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Past |
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Present |
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Future |
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- = Actual data ... = Line of best fit
Figure 3 A line of best fit and an "average" of the figures
The point of this exercise is to see whether our sales are trending up, down, or staying on an even plane. This method can be used to gain a trend for pricing in just the same way. Again we can extend the line to get an idea of future pricing. This method is commonly used by real estate investors, allowing them to understand the potential capital growth that a property may have.
We must be careful to use graphs as an indicator as they are not always correct. They show us what is most likely to happen in the future providing that past conditions remain relatively unchanged. A clever investor uses a graph such as this as a tool but also takes into account any available knowledge that they have about what is happening in markets and the economy in general. For example, we may have experienced improved market share delivering growth in sales over the last three years, however, due to a change in the economic climate we may loose some sales in the coming period. It would be a mistake in this circumstance to rely solely on information from the past to predict future business outcomes.
There is a range of measures by which organisations can gauge the likely direction of the economy, and these are listed as follows:
- Interest rates.
- Consumer Price Index (CPI).
- Government policy or change
- Consumer confidence, as reported regularly in news reports.
All these measures must be taken into consideration. To use an example, an increase in interest rates would lead to an increase the cost of credit to purchase goods or services, therefore causing consumer demand to slow. On the other hand increased advertising and strong promotional activity may counteract this downward trend, as would improvements in efficiency and reductions in prices.
Activity 1
The Accountant at The Creek Clothing Company would like you forecast the long-term income of the company to budget for future growth.
He has supplied you with some records, which give you the following information:
Year |
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
Sales Units |
42,000 |
53,000 |
47,000 |
57,000 |
69,000 |
81,000 |
Sell Price |
9.00 |
9.75 |
10.00 |
9.75 |
10.25 |
11.00 |
Revenue |
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- Using the table above, calculate the revenue received for each year.
- Using the graph below plot the sales in units per year and revenue per year.
Revenue |
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Sales Units |
1.1mil |
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145K |
1mil |
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120K |
900k |
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100K |
800k |
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90K |
700k |
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80K |
600k |
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70K |
500k |
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60K |
400k |
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50K |
300k |
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40K |
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1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
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Draw a trend line through each of the data and extrapolate each line to the year 2005.
What will the sales revenue and the number of units produced be in 2005?
If the company accountant allowed for a 2.5% increase in inflation each year what would be the unit price in 2003?
Extrapolate is to estimate from known values or data, which lie outside the range of those known.
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