Budget assessment of risks, sales forecasts, and ethical considerations

Risk Sales Forecast

Budgeting, Sales Forecasts, and Ethical Consideration

Sales forecasts and the budget preparation process in general, serves as a cornerstone for effective operations management. When this practice is performed with strict adherence to good business ethics it is one of the key components of the entire business planning process. With reliable estimates the organization can plan appropriates. Financial planning and estimation includes forecasted sales and revenues, expenses, and required cash flow to operate the business.

The budget will then combine all of the different estimates into a comprehensive document that can be used to plan for the future and to make business decision. The first activity in the budgeting process is usually a sales forecast. Once an organization determines what their projected levels of sales will be for any period, they can then estimate the other expenses based on this forecast. Accuracy of the sales forecast therefore is paramount to the planning process as many other estimates about other business functions depend on it. One study found that accurate sales projections are of vital importance to the profitability and long-term survival of high-tech companies; which is especially true in the growth stage of product innovation, because major investments and marketing decisions are made in this phase (Decker & Gnibba-Yukawa, 2010).

However, sales forecast planning can have many inherent problems. One problem is that sales representatives might be disinterested in participating or have an incentive to inflate their own personal estimate for various reasons. Drawing upon these tenets, a current research is developing ways that can identify the incentives that encourage sales people to provide accurate vs. inaccurate sales forecasts (Todd, Crook, & Lachowetz, 2013). There are many reasons an individual might be biased towards a forecasting. Executives might be trying to acquire capital or impress potential investors and artificially inflate the figures for their own personal ambitions.

Since sales forecasts are naturally subject to some error many people can take advantage of these figures and provide estimate that serve their own interest rather than put the organization's goals first. Sales forecast is an attempt to cope with risk and ambiguity of the market environment that allows business to shoot for realistic revenue targets. If these targets are not accurate, then this can put the organization at a significant disadvantage in the market. The sales forecasts allow the organization to forecast revenue as well as many other operating expenses. If the sales forecasts are not done considering all aspects of the business and the business environment, it will be difficult to make good business decisions based on accurate information and this can ultimately hurt the business.

There is much risk associated with sales forecasts because they often rely on subjective estimations. Therefore it is necessary to create sales forecast with proper risk analysis based on various scenarios that could unfold during the estimated period. Sales forecast should also try to understand what the competition is working on as well as their pricing strategy because this can also affect forecasts. It is often difficult to predict what others in the market will do however. Therefore the sales team should restrict higher forecasts to account for any potential market movements that could lower sales. Every sales forecast runs the risk of either losing a market share or incurring additional expenses due to excess inventory and must try to balance these two positions.