Forecasting: Definition, Elements, and Techniques

What is the Forecasting? It is a process of predicting or estimating the future based on past and present data. Business Forecasting can be broadly considered as a method or a technique for estimating many future aspects of a business or other operation. Planning for the future is a critical aspect of managing any organization, and small business enterprises are no exception. Forecasting provides information about the potential future events and their consequences for the organization. It may not reduce the complications and uncertainty of the future. However, it increases the confidence of the management to make important decisions.

The Concept of Planning is explaining Forecasting for Business, in points of Meaning, Definition, Elements, Importance, and Techniques.

In this article, we will discuss Forecasting for Business Planning: First Meaning of Forecasting, then Definition of Forecasting, after those Elements of Forecasting, Importance of Forecasting, and finally discussing Techniques of Forecasting. Forecasting is the basis of promising. Forecasting uses many statistical techniques. Therefore, it is also called a Statistical Analysis. Indeed, their typically modest capital resources make such planning particularly important.

In fact, the long-term success of both small and large organizations is closely tied to how well the management of the organization is able to foresee its future and to develop appropriate strategies to deal with likely future scenarios. Intuition, good judgment, and an awareness of how well the industry and national economy is doing may give the manager of a business firm a sense of the future market and economic trends.

Nevertheless, it is not easy to convert a feeling about the future into a precise and useful number. Such as next year’s sales volume or the raw material cost per unit of output. Forecasting methods can help estimate many such future aspects of a business operation.

#Meaning and Definition of Forecasting:

As we know planning is:

“A systematic economic and rational way of making decisions today that will affect tomorrow.”

Then forecasting becomes an integral part of the planning process, especially, strategic planning which is long-range in nature.

Lyndall Unrwick defined forecasting as it is involved to some extent in every conceivable business decision. The man who starts a business is making an assessment of future demand for its products. Also, The man who determines a production programme for the next six months or twelve months is usually also basing it on some calculation of future demand. The man, who engages staff, and particularly Young staff, usually have an eye to future organizational requirements.

Business forecasting refers to a systematic analysis of past and present conditions with the aim of drawing inferences about the future course of events.

Louis Allen defines forecasting as,

“A systematic attempt to probe the future by inference from known facts.”

Neter and Wasserman have defined forecasting as:

“Business forecasting refers to the statistical analysis of the past and current movement in the given time series so as to obtain clues about the future pattern of those movements.”

Perfect accuracy is not obtainable,” warned Richard Brealey and Stewart Myers in Principles of Corporate Finance.

“If it were, the need for planning would be much less. Still, the firm must do the best it can. Forecasting cannot be reduced to a mechanical exercise. Naive extrapolation or fitting trends to past data are of limited value. It is because the future is not likely to resemble the past that planning is needed. To supplement their judgment, forecasters rely on a variety of data sources and forecasting methods.”

For example, forecasts of the economic and industry environment may involve the use of econometric models. Which take account of interactions between economic variables. In other cases, the forecaster may employ statistical techniques for analyzing and projecting time series. Forecasts of demand will partly reflect these projections of the economic environment. But they may also be based on formal models that marketing specialists have developed for predicting buyer behavior or on recent consumer surveys to which the firm has access.

#Elements of the Forecasting:

The following elements of the forecasting process:

These are:

• Prepare the groundwork.
• Create a future business.
• Comparing actual with estimated results, and.
• Refining the forecasts.

Now, explain each one:

Prepare the Groundwork:

The group work preparation requires a thorough study, investigation, and analysis of the company, its products, its market share, its organizational structure, and the industry. The investigation will involve the past performance of all these factors. Their growth over a period of time and the extent of their inter-relationships and inter-dependence. The aim is to build a foundation on which future estimates can be based.

Create a Future Business:

The future expectancy of the business can be reasonably computed from the past data as well as the input from the key executives of the organization, sales personnel, and other specialists. This forecast is developed with the participation of the key personnel and is officially communicated to all. Thus all these people assume responsibility for meeting these forecasts and accountability for any deviations from this forecast.

Comparing Actual with Estimated Results:

The forecast estimates over the future years provide benchmarks against which the actual growth and results can be measured and compared. If there are significant variations between the two, one way or another, the reasons for such deviations can be investigated and analyzed.

Refining the Forecasts:

In the light of any deviations found, the forecast can be refined to be more realistic. If some conditions have changed during the periodic evaluation, then the new values of the variables can be incorporated into the estimates.

Thus, these constant revisions and refinements and improvements would add to the experience and skill in forecasting, since proficiency in forecasting can only be gained through practice and experience. The above elements indicate a systematic approach to the problem of forecasting. As to materiality, these elements are found in any research procedure.

#Importance of Forecasting:

Importance of forecasting involves the following key points:

• Forecasting provides relevant and reliable information about the past and present events and the likely future events. This is necessary for sound planning.
• It gives confidence to the managers for making important decisions.
• It is the basis for making planning premises, and.
• It keeps managers active and alert to face the challenges of future events and the changes in the environment.

#Techniques of Forecasting:

The following Forecasting technique can be classified into two major categories:

Qualitative Techniques:

The following techniques three types:

• Jury or executive opinion
• Salesforce estimates.
• Customer expectations.

Now, Explains:

Jury or Executive Opinion:

The jury of expert opinion sometimes referred to as the Dolphi technique; involves soliciting opinions or estimates from a panel of “experts” who are knowledgeable about the variable being forecasted. In addition to being useful in the creation of a sales or demand forecast, this approach is used to predict future technological developments. This method is fast less expensive and does not depend upon any elaborate statistics and brings in specialized viewpoints.

Sales Force Estimates:

This approach involves the opinion of the sales force and these opinions are primarily taken into consideration for forecasting future sales. The sales people, being closer to consumers, can estimate future sales in their own territories more accurately. Based on these and the opinions of sales managers, a reasonable trend of the future sales can be calculated.

These forecasts are good for short-range planning since salespeople are not sufficiently sophisticated to predict long-term trends. This method known as the “grassroots” approach lends itself to easy breakdowns of product, territory, customer etc., which makes forecasting more elaborate and comprehensive.

Customer Expectations:

This type of forecasting technique is to go outside the company and seek subjective opinions from customers about their future purchasing plans. Also, Sales representatives may poll their customers or potential customers about the future needs for the goods and services the company supplies. Direct mail questionnaires or telephone surveys may be used to obtain the opinions of existing or potential customers.

This is also known as the “survey method” or the “marketing research method” where information is obtained concerning. Customer buying preferences, advertising effectiveness and is especially useful where the target market is small such as buyers of industrial products, and where the customers are co-operative.

Quantitative Techniques:

Quantitative techniques are based on the analysis of past data and its trends. These techniques use statistical analysis and other mathematical models to predict future events.

Some of these techniques are:

• Time series analysis.
• Economic models.
• Regression analysis.

Now, Explains:

Time Series Analysis:

Time series analysis involves decomposition of historical series into its various components, viz., trend, seasonal variations, cyclical variations, and random variations. Also, Time series analysis uses index numbers but it is different from barometric technique. In the barometric technique, the future is predicted from the indicating series, which serve barometers of economic change.

In time series analysis, the future is taken as some sort of an extension of the past. When the various components of a time series are separated, the variations of a particular phenomenon, the subject under study stay say price, can be known over the period of time and projection can be made about future.

A trend can be known over the period of time, which may be true for the future also. However, time series analysis should be used as a basis for forecasting when data are available for a long period of time and tendencies disclosed by the trend and seasonal factors are fairly clear and stable.

Economic Models:

Utilize a system of interdependent regression equations that relate certain economic indicators of the firm’s sales, profits etc. Also, Data center or external economic factors and internal business factors interpreted with statistical methods. Often companies use the results of national or regional econometric models as a major portion of a corporate econometric model.

While such models are useful in forecasting, their major use tends to be in answering “what if”? Questions. These models allow management to investigate and in major segments of the company’s business on the performance and sales of the company.

Regression Analysis:

Regression Analysis is statistical equations designed to estimate some variables such as sales volume, on the basis of one or more ‘independent’ variables believed to have some association with it.