Importance, Advantages, Limitations of Business Forecasting

Importance of Forecasting in Business – As we know Business forecasting is an act of predicting future economic conditions based on past and present information. 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 business. Define, Business Forecasting is the calculation of probable events, to provide against the future. It, therefore, involves a ‘look ahead’ in business and an idea of predetermination of events and their financial implications as in the case of budgeting. So, what we discussing is – Importance, Advantages, Limitations of Business Forecasting in Business.

The Concept of Financial Management is explaining Business Forecasting for Business, in points of Importance, Advantages, and Limitations.

In this article, we will discuss Business Forecasting for Business: First Importance of Business Forecasting, then basic Advantages of Business Forecasting, after that main Advantages of Business Forecasting, and finally discussing Limitations of Business Forecasting. Let’s start discussing:

Importance of Business Forecasting:

The following key points show the growing importance of business forecasting:

These are:

• Plan Formulation.
• Estimation of financial requirements.
• Smooth and continuous working of a concern.
• The correctness of management decisions.
• Promotion for new business.
• Success in business.
• Co-Operation and coordination, and.
• Complete Control.

Each one Explanation:

Plan Formulation:

The importance of correct forecasting is apparent from the Key role it plays in planning. It should not go unaccounted that forecasting is an essential element in planning since planning premises include some forecasts. There are forecast data of a factual nature having enormous implication on sound premises. Undoubtedly, forecasting is a prelude to planning and indeed it is the foundation on which planning takes place.

In fact, planning under all circumstances and in all occasions involve a good deal of forecasting, i.e. appraising the future in the light of existing conditions and environment. Forecasting and planning are closely related. Adequate planning, no matter whether it is overall or sectoral, short-term or long-term, largely depends on forecasting.

Estimation of financial requirements:

The importance of forecasting can’t ignore in estimating the financial requirements of a concern. Efficient utilization of capital is a delicate issue before the management. No business can survive without adequate capital.

But adequacy of either fixed or working capital depends entirely on sound financial forecasting. Financial estimates can calculate in the light of probable sales and cost thereof. How much capital needs for expansion, development, etc., will depend upon accurate forecasting?

Smooth and continuous working of a concern:

“Forecasting of earnings” ensures smooth and continuous working of an enterprise, particularly to newly established ones. By forecasting, these concerns can estimate their expected profits or losses. The object of a forecast is to reduce in black and white the details of working of a concern.

The correctness of management decisions:

The correctness of management decisions to a great extent depends upon accurate forecasting.

“Administration is essentially a decision-making process and authority has responsibility for making decisions and for ascertaining that the decisions made are carried out. In business, whether the enterprise is large or small, changes in conditions occur; shifts in personnel take place, unforeseen contingencies arise. Moreover, just to get the wheels started and to keep them turning, decisions must be made.”

This shows that the decision-making process continues throughout the life of the concern. Forecasting plays an important role in various fields of concern. As in the case of production planning, management has to decide what to produce and with what resources. Thus forecasting considers an indispensable component of the business because it helps management to take correct decisions.

Promotion for new business:

Forecasting is of utmost importance in setting up a new business. It is not an easy task to start a new business as it is full of uncertainties and risks. With the help of forecasting the promoter can find out whether he can succeed in the new business; whether he can face the existing competition; what is the possibility of creating demand for the proposed product etc.

After discovering the business opportunity, he will see the possibilities of assembling men, money, materials etc. The success of a business unit depends upon as to how sound is the forecasting? Proper forecasting will help to minimize the role of luck or chance in determining business success or failure. A successful promoter is also the prophet of economic conditions.

Success in business:

The accurate forecasting of sales helps to procure necessary raw materials based on which many business activities undertake. Accurate sales forecasting becomes the basis for several other budgets. In the absence of accurate sales forecasting, it is difficult to decide as to how much production should be done.

Thus, to a great extent, the budgets of other departments depend upon the compilations based on the sales forecasts and the accuracy of these budgets also depends upon the correctness of sales forecasting. Thus, the success of a business unit depends on accurate forecasting by the various departments.

Cooperation and coordination:

Forecasting is not one man’s job. It needs proper co-ordination of all departmental heads in a company. Thus, by bringing the participation of all concerned in the process of forecasting, team spirit and co­ordination automatically encourage.

According to Henry Fayol,

“The act of forecasting is of great benefit to all who take part in the process and is the best means of ensuring adaptability to changing circumstances. The collaboration of all concerned leads to a united front, an understanding of the reasons for decisions and a broadened outlook.”

Complete Control:

Forecasting provides the information which helps in the achievement of effective control. The managers become aware of their weaknesses during forecasting and through implementing better effective control they can overcome these weaknesses.

Basic Advantages of Business Forecasting:

The following Advantages of Business Forecasting basically understand:

• By forecasting regularly, it forces you to continually think about your future and where your business is headed. Also, This will allow you to foresee changing market trends and stay ahead of your competition.
• Keep your customers satisfied by providing them with the product they want, when they want it. The advantage of forecasting in business will help predict product demand so that enough product (or staffing) is available to fill customer orders particularly if demand is seasonal.
• If you expect to apply for a loan or line of credit, your financial institution will likely ask you to provide them with forecasting reports with your submission.
• Forecasting can give you the intelligence to anticipate a downturn in sales and plan for it. Likewise, it can alert you to periods when you can expect an increase in sales and you can organize additional staffing ahead of time.
• If you can’t measure it, you can’t improve it. Setting goals alongside your business forecast allow you to track your progress and plan your operations that are aligned with what you want to achieve.

Main Advantages of Business Forecasting:

The following Advantages of Business Forecasting below are:

These are:

• Create Own a New Business.
• Your Business Formulating Plans.
• Based-Business Estimating Financial Require.
• Facilitating Managerial Decisions.
• Mostly Quality of Management.
• Encourages Cooperation and coordination.
• Control Better Utilisation of Resources, and.
• Finally get Success in Business.

Here are Explain each:

Create Own a New Business:

While setting up a new business, several business forecasts are required. One has to forecast the demand for the product, the capacity of competitors, expected share in the market, the amount and sources of raising finances, etc. The success of a new business will depend upon the accuracy of such forecasts. If the forecasts are made systematically, then the operations of the business will go smoothly and the chances of failure will be minimized.

Your Business Formulating Plans:

Forecasting provides a logical basis for preparing plans. Also, It plays a major role in managerial planning and supplies the necessary information. The future assessment of various factors is essential for preparing plans. In fact, planning without forecasting is an impossibility. Henry Fayol has rightly observed that the entire plan of an enterprise is made up of a series of plans called forecasts.

Based-Business Estimating Financial Require:

Every business needs adequate capital. In the absence of correct estimates of financial requirements, the business may suffer either from inadequate or from excess capital. Forecasting of sales and expenses helps in estimating future financial needs. Also, The plans for expansion, diversification, or improvement necessitate the forecasting of requirements of funds. Proper financial planning depends upon systematic forecasting.

Facilitating Managerial Decisions:

Forecasting helps management to take correct decisions. By providing a logical basis for planning and determining in advance the nature of future business operations, it facilitates correct managerial decisions about material, personnel, sales, and other requirements.

Mostly Quality of Management:

It improves the quality of managerial personnel by compelling them to look into the future and make provision for the same. By focussing attention on the future, forecasting helps the management in adopting a definite course of action and a set purpose.

Encourages Cooperation and coordination:

Forecasting calls for some minimal effort on the part of all and. thus, creates a sense of participation. Also, It is not one man’s or one department’s job. No department or person can make its forecasts in isolation.

There should be a proper co-operation and co-ordination among different departments for setting proper forecasts for the business as a whole. So, the forecasting process leads to better co-operation and co-ordination among people of various departments of the organization.

Control Better Utilization of Resources:

Forecasting ensures better utilization of resources by revealing the areas of weaknesses and providing necessary information about the future. Also, Management can concentrate on critical areas and control more effectively.

Finally get Success in Business:

Success in business, to a great extent, depends upon correct predictions about the future. Systematic forecasting ensures the smooth and continuous working of the business. By knowing the future course of events in advance, one could always face the difficulties in a planned manner.

Limitations of Business Forecasting:

In spite of many advantages, some people regard business forecasting,

“As an unnecessary mental gymnastics and reject it as a sheer waste of time, money and energy.”

The reason for the same lies in the fact that despite all precautions, an element of error is bound to creep in the forecasts and we cannot eliminate guesswork in forecasts.

It is also felt that forecasting is influenced by the pessimistic or optimistic attitude of the forecaster. It may not be possible to make forecasts with pinpoint accuracy. But, it still cannot undermine the importance of business forecasting.

The management should first make use of statistical and econometric models in making forecasts and then apply collective experience, skill and objective judgment in evaluating the forecasts. Further, the forecasts should be constantly monitored and revised with the changed circumstances.