Question

Briefly describe how analysts typically forecast each of the following items: Sales, Cost of Sales, Inventory, and Tax expense.

Answer 1

Forecasting is the predicting the future. Although the future itself is unpredictable but in financial world forecasting shapes companies course of actions. Analyst forecasts almost each items of finance in order to make the plan effective.

!. Sales:-

Sales is the backbone of every organisation and it is utmost important. It s the revenue generating activity of the firm. The firms growth depends upon the sales. Analyst predicts the sales by following logical assumptions. Analyst often predicts a ten percent increase in sales year on year on a normal condition. But if the company is really doing well then the sales figures might go up even further. They also sees the competition level and the position of company in the market. if the competition is tough then there might be difficulty for the company to maintain and increase high level of sales or vice-versa.

2. Cost of sales:-

If the sales are increasing then the cost of sales will also go up. All the direct costs like material will increase. Apart from these indirect expenses will also increase. These will increase the cost of sales. If the operating efficiency is really well managed then only cost of sales will go down but that is an ideal condition. So, generally, if sales are increasing , cost of sales will also increase.

3. Inventory:-

Inventory is directly related with sales. To pace up with the high demand the company is required to maintain high levels of sales. High level of sale is not possible without keeping high level of inventory. So if the forecasted sales is high then the inventory will also be high.

4.Tax expense:-

Taxes are levied on the income of the company. If the income is high then the tax will be higher and vice-versa. Although the high levels of sales does not suggest high level of tax as taxes are levied on the income not on sales. But rising level of sales will generally give high level of income So, generally, if there are more sales then the company should prepare itself for the more taxes.