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QUESTION

TWISTED FORK BRAVEVARD PAPER

Company Name: Twisted Fork of Brevard in Florida.  They are a food catering company.

PLEASE FOLLOW THESE INSTRUCTIONS ON NEEDED DETAILS:

Here’s what you have to do to construct a Pro Forma Forecast of Annual Sales Volume.  These steps will help you to define your entire business so don’t omit any of them.

1)      Decide on the measure of volume that will describe your business.  This is a very critical step because the measure will be used for both pricing and performance measurement. Don’t default – as some students have in the past - to using Sales Revenue (S) as the unit of measure.  This is incorrect.  Sales Revenue is not a measure of volume, but is instead the result of multiplying sales volume by unit price.  There is ALWAYS a way to state volume in a tangible manner.   If you are selling a product, the measure of volume is typically “units.”   Sometimes the units are described more specifically.  For example, in the auto industry, the volume could be described in generic terms – GM expects to sell 25,000 units next year, but typically the business focuses the volume measure more specifically – for example, 25,000 cars or even more specifically, 25,000 Corvettes, depending upon the information needs of the intended audience.   In service businesses, defining the measure of volume becomes a bit more difficult.  Typically services are sold by the hour, so the measure of volume is often stated in “hours of service.”  For example, consultants measure volume in terms of “contact hours.”   Other service companies that provide some kind of improvement to a tangible object would measure volume on the basis of number of objects handled.  For example, dry cleaners might measure volume on the basis of “number of garments cleaned.”  A shipping company might measure volume on the basis of “truckloads dispatched.”

2)      Analyze your proposed business to discover what factors tend to influence the buyer behavior and drive more or less sales volume.  Look for factors for which both historical data and future forecasts are available.  For example, a business might find that its expected volume is related to the unemployment rate.  A gas station might find that the volume of gasoline sold is related to how large the unemployed population becomes.  Discover the relationship by looking at historical data comparing the reported factor in relation to consumption of the item that you are proposing to market.

3)      Using historical data, develop algorithms that relate the consumption to the influencing factor.  For example, you might find that for every .06% increase in the unemployment rate, the volume of consumption (demand) for your proposed product will diminish by 3,000 units.

4)      Using the forecast for the influencing factor, apply your algorithm to predict you future sales volume.  For example, from the Bureau of Labor Statistics' outlooks for next year’s unemployment rate, predict the increase or decrease in sales volume for your product.

5)      Produce a table that shows this volume for a multi-year period into the future.  Typically, a forecast will look into the future for three to five years.   It helps to also plot the volume forecast on a graph, so the trend can be observed.

Make sure you do construct a forecast of expected volume for your proposed business in this chapter, because future chapters depend on this data to build other forecasts.  For example, chapter 6 will call for you to create a Pro Forma Income Statement.  This will require you to multiply all the unit factors such as price and cost, by the volume forecast that you will produce in Chapter 3.  You can’t do chapter 6 until you have built this volume forecast.

Now for this classroom exercise, do you need to be so scientific in creating your forecast?   No, just understand the methodology and do some basic research to understand the factors that influence the demand for your product.  Create a table that represents your best efforts to predict the volume with the limited data and time that you have available.   Just be sure to have a table filled with what you think are reasonable volume data for your business proposal, as you will need this as your plan develops.

Keith Sheldon

Use this outline for the chapter:

3.0     MARKET ANALYSIS

3.1     Market Segmentation

3.2     Target Market Size and Trends

3.4     Competitor Analysis - Direct and Indirect

3.5    Pro Forma Forecast of Annual Sales Volum

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