Business Forecasting Techniques, Elements, and Steps

Discover essential techniques, elements, and steps for effective business forecasting. Enhance your decision-making with our comprehensive insights and resources. Business forecasting is an act of predicting the future economic conditions on the basis of past and present information. Also, 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.

The Concept of Accounting explains Business Forecasting in the points of Elements, Techniques, and Steps.

In this article discussing Business Forecasting: First Essential Elements of Business Forecasting, then the second Techniques of Business Forecasting, and finally Steps of Business Forecasting. Also, 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, industrialist, and economists to plan accordingly to reduce the harmful effects of trade cycle’s statistics is thus needed for the purpose of controlling the business-cycles. So, discussing each point of Business Forecasting.

Essential Elements of Business Forecasting

The following Essential Elements below are:

1. Essential Elements of Business Forecasting:

The need for forecasting is apparent from the key role it plays in planning. Forecasting has great use in developing plans. The making of forecasts and their review by managers results in thinking ahead, looking to the future, and making provisions for it. Also, the very act of forecasting may disclose areas where necessary control is lacking. Forecasting, especially where widely participated by all in the organization, may help to unify and coordinate plans. By focussing attention on the future, it assists in bringing a singleness of purpose to planning.

2. Elements of Forecasting:

Forecasting helps us to know the future. It also helps us to compare, to estimate and to analyze the data to arrive at the estimated results. It leads to the regular investigation of different aspects of production and management within and outside the organization. Forecasting prepares a ground to work together and brings better co-ordination, co-operation, and control in the organization. Under forecasting, future prospects, stability, and the discrepancies are properly weighed and studied. Also, This helps the management to remove any hindrances that may come in the way of management.

Thus company results are compared with the estimated ones, the other element which is quite conspicuous with forecasting. Whenever the large difference is found, further investigation is undertaken to find out the reasons for such discrepancy. Forecasting, therefore, helps to know the expected profits or losses and just by going through certain reports and records of the company, enables the forecaster to take necessary decisions. Decision-making becomes better and easier when forecasting is undertaken on a scientific basis.

James W. Redfield has summarized the essential elements as follows:

Developing the groundwork: It carries out an orderly investigation of products, company, and industry.
Estimating future business: This follows a clear-cut plan for working out future expectancies in the form of natural undertaking with key executives.
Comparing actual with estimated results: Checking the attained with anticipated results of the business periodically and tracking down reasons for major differences.
Refining the Forecast Process: Once familiarity with estimating the future of the business is gained through practice, sharpening the approach and refining the procedure becomes quite easy.

Techniques of Business Forecasting:

The following Techniques of Business Forecasting below are:

Direct/Bottom-up method:

Under this method, different departmental heads and their subordinates collect information and data for different aspects of production, sales, purchases, personnel etc. Also, This data, later on, is compiled together as the data for the company as a whole. It means every department/section makes its own forecast which is, later on, clubbed together as an aggregated data for the company.

Indirect/Top-Down method:

The requirements of the entire trade or industry are estimated first and then the share of the particular unit is ascertained. The constituent departments, later on, get their share from the company and hence the estimation has been made indirectly without giving any free hand in the compilation of data. In this case, the responsibility of successful forecasting rests with the top executives.

Empirical Method:

Under the empirical method, the future is predicted in terms of past experience which is the basis of prediction. The empirical forecasting is based on the method of the sequence which assumes that business follows a pattern that certain indexes anticipate the general business trend. They strive to find out such an index and devote much time to constructing curves.

Scientific Forecasting:

Scientific forecasting strives to use scientific methodology in establishing causal relationships. In this case, the businessmen mostly rely upon the past experience in predicting the future. Previous experience properly organized and interpreted in terms of causal relationship is the basis of scientific forecasting. The scientific forecaster may use many of the tools of the empirical forecaster, but he uses them as guides or aids in interpreting causal relationships.

Historical Method:

This method mainly deals with the analysis and interpretation of past events as a basis for understanding current problems and forecasting future trends. Here data concerning the past production, sales, purchases, capital needs etc. of the industry as a whole and the particular firm are compiled and tabulated. This method helps the management to know not only the future trend but also effects of trade cycles, and the correlation between different aspects of production.

Its principal advantages are as follows:

It takes into consideration the past records.
Such past records can be easily procured, and.
Also, The present is also not neglected.

Some of its disadvantages are:

It is not always possible to find the trend or cyclical movements of past data or to develop correlation or mathematical relationship between them and other variables which have bearing upon them, and.
It is not possible for firms of average size to afford such a costly investigation.

Deductive Method:

This method is just the reverse of the historical method. No past information or data is taken into account under this method for deciding the future trend. Forecasters, under this method, believe that the old data becomes obsolete after the lapse of a certain time and hence give more emphasis on the current data available in the organization. But objective and subjective judgments are given all the importance. The forecaster at his individual discretion analyses the current information and derives certain conclusions, pertaining to the results in the near future.

Its main advantages are as follows:

It takes into account the latest development; hence it is more dynamic in character.
It enables the management to get information as to the future without waiting for the past information, and.
Delay in forecasting certain events or results is avoided. The main drawback of this method is that it relies more on individual judgment than on the past record.

Joint-Opinion Method:

Any work of forecasting under this method is done in consultation with persons who are directly concerned with the problem. The responsibility of exactness is shared by many and the error of judgment is avoided to a greater extent. It is based on the committee type of approach and as such, better understanding and co-operation is expected in arriving at the accurate judgment. The number of experienced experts who are in direct touch with the forecast pools their judgment. The forecasting in this way is likely to be more accurate. This method is a definite improvement on the deductive method and the individual’s discretionary views or monopoly is discarded.

Its principal advantages are:

It is very easy and simple to administer
There is no need for detailed statistical study
Experience of the experts is properly utilized.

Some of its disadvantages are:

Members of the committee may not take the keen interest in preparing the forecasts as the responsibility is a joint and not several ones
Also, It sometimes degenerates into mere guesswork
It cannot be applied to the forecast of a section, department or another subordinate unit.

Steps of Forecasting:

The process of forecasting consists of the following steps, also described as elements of forecasting:

Developing the Basis:

The first step involved in forecasting is developing the basis of the systematic investigation of the economic situation, the position of industry and products. Also, The future estimates of sales and general business operations have to be based on the results of such investigation. The general economic forecast marks as the primary step in the forecasting process.

Estimating Future Business Operations:

The second step involves the estimation of conditions and course of future events within the industry. On the basis of information/data collected through investigation, future business operations are estimated. The quantitative estimates for a future scale of operations are made on the basis of certain assumptions.

Regulating Forecasts:

The forecasts are compared with actual results so as to determine any deviations. The reasons for his variations are ascertained so that corrective action is taken in future.

Reviewing the Forecasting Process:

Once the deviations in forecasts and actual performance are found then improvements can be made in the process of forecasting. The refining of the forecasting process will improve forecasts in the future.

Sources of Data Used In Business Forecasting:

Collection of data is the first step in any statistical investigation. It is the basis for any analysis and interpretations. Before the collection of data, many questions shall occupy the mind of the manager. The manager must be able to answer these questions before the task of the collection is started.

These questions are:

Why collect data?
What kind of data to be collected?
When it is to be collected?
Where from it should be collected?
Who will collect it?
Also, How it shall be collected?

The answer to these questions is nothing but planning the collection of data. Planning for data collection refers to thinking or preparing before doing the actual task of data collection. The purpose or object of data collection, the scope of the data, the unit of data collection, the technique and sources of data are the important consideration in planning the data collection. Data may be collected from primary or secondary sources depending upon the time, resources, and purpose of the investigation.

Primary Sources:

It is a first-hand data collected personally by the investigator. It is costly and time-consuming. Primary data is collected if secondary data is not available. It is collected by personal interviews, questionnaires or observations.

Secondary Sources:

These sources of data refer to already published data or data collected by other agencies. It is a secondhand data. Here the task is more of a compilation of data.

The sources of secondary data are:

Official reports of the government.
Publications Financial source, Financial institutions etc.
Also, Annual reports of companies.
Journals, Newspapers, Magazines etc.

A lot of care and caution is necessary before using the secondary data. Such data is cheaper, quicker and easily available. The essence of all the above Steps and Sources is that business forecasting is a technique to analyze the economic, social and financial forces affecting the business with an object of predicting future events on the basis of past and present information.