Budgeting, therefore, takes into consideration various factors to come up with an appropriate forecast. For Guillermo furniture to produce correct sales estimates within its forecast budget, it s needs t to consider the factors affecting its production including the competitor’s possession of advanced equipment, and the ethical considerations which affect its budget (Kress & Snyder, 1994). The sales forecast is affected by various factors ranging from economic situations, competitors’ actions, alterations in firm operations, among others. The role of competitors emerges as a key factor to Guillermo in the development of its sales estimates. The need to put this into consideration is vital. Sales forecasting is often a rather cumbersome process. It involves the prediction of the expected sale in the future. Prediction data are often supported with the existing documentation on the projected client spending on particular items in comparison to the units to be produced by the company. Forecasting of sales, however, presents a number of risks to the operations of the business. The risks may be classified as production risks, resource risks, and financial risks.
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Risk in sales forecasting
Production risks involve manufacturing processes. Manufacturing processes are based on scheduled productions by a given corporation. The forecasts dictate raw material purchases to facilitate the production of goods. Failures in sales forecasting are likely to result in overproduction or underproduction (Kress & Snyder, 1994). Often poor sales forecasting contributes to an increase in lead times client frustration and excess products production. When excess raw materials are bought as a result of inaccurate sales forecasting the stock is tied up in un-purchased products and hence reduced flow of cash.
Resource Risks involve both production resources and resources which facilitate production. Allocation of resources includes personnel is dependant on sales forecasts. failure to make accurate sales forecasts could result in over-allocation or under-allocation of resources (Makridakis & Hyndman, 1998). This affects service levels and employees may be subjected to excessive work of under-productivity. Excess employees may call for downsizing which may not go down well with fellow workers and clients. Clients are likely to feel that the business is under turbulent conditions and fearing losses go to other places for services.
Financial Risks are common in sales forecasting as it involves the allocation of resources. Excess forecasts lead to increase storage costs which may not have been accounted for in the budgeted forecast. This is in consideration of the fact that capital allocation, and borrowings are usually based on sales forecasting. For instance budgeting for 10 types of machinery worth $100,000 could change if more sales are recorded and there is a need for the purchase of more machinery for the increase in production and hence increase in fiscal spending. On the contrary, over forecasting could lead to the purchase of excess machinery which would lie un-productive and hence lead to a loss in return on investments.
Ethical Factors in Sales Forecasting
Sales forecasting calls for consultation between the management and the staff. Respect for the employee’s opinions is a necessity as they bear information that could eventually save the company a lot in terms of inappropriate spending (McNamara, 2008). The management has an obligation to uphold values and ethical behaviors which add value to the budgeting process and desist from those which deduct. Sales forecasting is therefore guided by a number of ethical issues including trustworthiness, respect for all, responsible actions, care and compassion, and most importantly justice and fairness in decision making (McNamara, 2008). The case of the Guillermo budget presents a scenario of the effect of variables that are unfavorable to the operations of the business. the hourly and pay to workers increased, while at the same time projected production levels declined. additionally, competitors entered the market with improved technology and low-cost production. reducing workers’ hourly earnings have the potential to effectively reduce the company’s operation expenditure. however, ethical consideration of its implication must guide such a decision. The case is not an issue of lack of market but rather lack of competitiveness. rather than reducing workers’ compensation, the company should rather invest in more assets that would improve its competitiveness and regain market share (Horngren & Stratton, 2008).
In conclusion, it is important to note that Guillermo is not suffering a case of market decline or changes but a change in a variable. Technology is its major casualty and it needs to invest heavily n it as reducing hourly earnings of staff could result in their loss to competitors, The budgeting team should focus on how to regain market control rather than how to reduce cost as eventually cost reduction would not solve the problems and challenges they experience. Reducing cost would only allow them to operate for some time in the wave of possible loss of all the clients who would prefer cheaper, quality products as compared to expensive quality products. Additionally, their production lead time is under fire based on market trends and this too is a lag in technology for the company. This should form the focus for budgeting.
Horngren, S. & Stratton, B. (2008). Introduction to Management Accounting. Prentice Hall, Saddle Brook, New Jersey.
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Kress, G. & Snyder, J. (1994). Forecasting and market analysis techniques: a practical approach. Westport, Connecticut, London: Quorum Books.
Makridakis, S. & Hyndman, R. J. (1998). Forecasting: methods and applications. New York: John Wiley & Sons.
McNamara, C. (2008) Complete Guide to Ethics Management: An Ethics Toolkit for Managers. Web.