Examples Why a need for Business Forecasting to Business?

Need for Business Forecasting to Business examples the Theories. Business Forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits. It refers to the technique of taking a perspective view of things likely to shape the turn of things in the foreseeable future. As the future is always uncertain, there is a need for an organized system of forecasting in a business. Given the wide swings in economic activity and the drastic effects these fluctuations can have on profit margins; it is not surprising that business forecasting has emerged as one of the most important aspects of corporate planning. So, what we the question is: Different Theories explain why a need for Business Forecasting to Business?

The Concept of Financial Management Examples Business Forecasting for Business, in points of Theories and Need.

In this article, we will discuss Business Forecasting for Business; First Theories of Business Forecasting, that we look again at the need for Business Forecasting. So, let’s discuss: The essence of all the previous article on business forecasting is to explain meaning and definition is that business forecasting is a technique to analyze the economic, social, and financial forces affecting the business with the object of predicting future events based on past and present information. Need to study: Importance, Advantages, Limitations of Business Forecasting to Business.

Examples the different theories of Business Forecasting:

The following different theories Examples Business Forecasting needed are:

Historical:

This theory is based on the assumption that history repeats itself. It simply implies that whatever happened in the past under a set of circumstances is likely to happen in the future under the same set of conditions. Thus, a forecaster has to analyze the past data to select such a period whose conditions are similar to the period of forecasting. Further, while predicting for the future, some adjustments may make for the special circumstances which prevail at the time of making the forecasts.

Action and Reaction:

This theory is based on Newton’s ‘Third Law of Motion’, i.e., for every action; there is an equal and opposite reaction. When we apply this law to business, it implies that if there is depression in a particular field of business; there is bound to be a boom in it sooner or later. It reminds us of the business, cycle which has four phases, i.e., prosperity, decline, depression, and prosperity.

This theory regards a certain level of business activity as normal and the forecaster has to estimate the normal level carefully. According to this theory, if the price of the commodity goes beyond the normal level; it must come down also below the normal level because of the increased production and supply of that commodity.

Economic Rhythm:

This theory propounds that the economic phenomena behave rhythmically and cycles of nearly the same intensity and duration tend to recur. According to this theory, the available historical data have to analyze into their components, i.e. trend, seasonal, cyclical, and irregular variations. The secular trend obtains from the historical data project several years into the future on a graph or with the help of mathematical trend equations.

If the phenomena are cyclical in behavior, the trend should adjust for cyclical movements. When the forecast for a year is to be split into months or quarters then the forecaster should adjust the projected figures for seasonal variations also with the help of seasonal indices. It becomes difficult to predict irregular variations and hence, the rhythm method should use along with other methods to avoid inaccuracy in forecasts. However, it must remember that business cycles may not be strictly periodic and the very assumptions of this theory may not be true as history may not repeat.

Sequence Method/Time-Lag Method:

This theory is based on the behavior of different businesses which show similar movements occurring successively but not simultaneously. As such, this method takes into account time lag based on the theory of lead-lag relationship which holds good in most cases. The series that usually change earlier serve as the forecast for other related series. However, the accuracy of forecasts under this method depends upon the accuracy with which time lag estimate.

Cross-Cut Analysis:

In this method of business forecasting, the combined effect of various factors is not studied; but the effect of each factor, that has a bearing on the forecast, is studied independently. This theory is similar to the Analysis of Time Series under the statistical methods.

Modernity:

This approach makes use of mathematical equations for drawing economic models. These models depict the inter-relationships amongst the various factors affecting the economy or business. The expected values for dependent variables then ascertain by putting the values of known variables in the model. This approach is highly mechanical and this can rarely employe in business conditions. Very helpful: Elements, Techniques, and Steps of Business Forecasting.

The Need for Business Forecasting:

Some of Examples the important needs of business forecasting list below:

These are Six need:

• Production Planning.
• Financial Planning.
• Economic Planning.
• Workforce Scheduling.
• Decisions Making, and.
• Controlling Business Cycles.

Now, Explain each one:

Production Planning:

The rate of producing the products must match with the demand which may be fluctuating over the time period in the future. Since its time consuming to change the rate of output of the production processes; so, the production manager needs medium-range demand forecasts to enable them to arrange for the production capacities to meet the monthly demands which are varying.

Financial Planning:

Sales forecasts are a driving force in budgeting. Sales forecasts provide the timing of cash inflows and also provide a basis for budging the requirements of cash outflows for purchasing materials, payments to employees and to meet other expenses of power and utilize, etc. Hence forecasting helps finance managers to prepare budgets taking into consideration the cash inflow and cash outflows.

Economic Planning:

Forecasting helps in the study of macroeconomic variables like population, total income, employment, savings, investment, general price-level, public revenue, public expenditure, the balance of trade, the balance of payments, and a host of other macro aspects at national or regional levels. The forecasts of these variables are generally for a long period of time ranging between one year to ten or twenty years ahead. Much would depend on the perspective of planning, longer the perspective longer would be period of forecasting. Such forecasts often call projections. These are helpful not only for planning and public policymaking; but, they also include likely economic environment and aid formulation of business policies as well.

Workforce Scheduling:

The forecast of monthly demand may further break down to weekly demands and the workforce may have to adjust to meet these weekly demands. Hence, forecasts need to enable managers to get in tune with the workforce changes to meet the weekly production demands.

Decisions Making:

The goal of the forecaster is to provide information for decision-making. The purpose is to reduce the range of uncertainty about the future. Businessmen make forecasts to make profits. In business, the forecast has to be done at every stage. A businessman may dislike statistics or statistical theories of forecasting, but he can not do without making forecasts. Business plans of production, sales, and investment require predictions regarding the demand for the product; the price at which the product can be soled, and the availability of inputs.

The forecast for demand is the most crucial. The operating budgets of various departments of a company have to be based upon the expected sales. Efficient production schedules, minimization of operating cost, and investment in fixed assets are when accurate forecasts recording sales and availability of inputs are available.

Controlling Business Cycles:

It is commonly believed that business cycles are always very harmful in their effects. Abrupt rise and fall in the price level injurious not only to businessmen but to all types of persons, industries, trade, agriculture. All suffer from the painful effects of depression. The Trade cycle increases the risk of business; creates unemployment; induces speculation and discourages capital formation.

Their effects are not confined to one country only. Business forecasting reduces the risk associated with business cycles. Prior knowledge of a phase of a trade cycle with its intensity and expected period of happening may help businessmen, industrialists, and economists to plan accordingly to reduce the harmful effects of trade cycle statistics is thus needed to control the business cycles.