What is Business Forecasting? Business Forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits. 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 discussing is – Meaning, Definition, Types, Need of Business Forecasting.
The Concept of Management explains Business Forecasting in the points of Meaning, Definition, Types, and Need.
In this article discussing Business Forecasting: First Meaning of Business Forecasting, then the second Definition of Business Forecasting, the third Types of Business Forecasting, and finally Need of Business Forecasting. Forecasting has become an invaluable tool for business people to anticipate economic trends and prepare themselves either to benefit from or to counteract them.
If, for instance, business people envision an economic downturn, they can cut back on their inventories, production quotas, and hiring. If, on the contrary, an economic boom seems probable, those same business people can take the necessary measures to attain the maximum benefit from it. Good business forecasts can help business owners and managers adapt to a changing economy.
Meaning of Business Forecasting:
Business forecasting is an act of predicting the future economic conditions on the basis of 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.
Thus, scientific business forecasting involves:
- Analysis of the past economic conditions, and.
- Analysis of the present economic conditions; so as to predict the future course of events accurately.
In this regard, business forecasting refers to the analysis of the past and present economic conditions with the object of drawing inferences about the future business conditions.
Definition of Business Forecasting:
In the words of Allen,
“Forecasting is a systematic attempt to probe the future by inference from known facts. The purpose is to provide management with information on which it can base planning decisions.”
Leo Barnes observes,
“Business Forecasting is the calculation of reasonable probabilities about the future, based on the analysis of all the latest relevant information by tested and logically sound statistical econometric techniques, as interpreted, modified and applied in terms of an executive’s personal judgment and social knowledge of his own business and his own industry or trade.”
In the words of C.E. Sulton,
“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.”
According to John G. Glover,
“Business Forecasting is the research procedure to discover those economic, social and financial influences governing business activity, so as to predict or estimate current and future trends or forces which may have a bearing on company policies or future financial, production and marketing operations.”
The essence of all the above definitions 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.
Types of Business Forecasting:
Various types of Business Forecasting are –
- General Forecast.
- Sales Forecast, and.
- Capital Forecast.
General Business Forecast:
No business is completely independent and hence general business forecast is undertaken. It helps to read the future conditions for business and to predict the probable changes in business conditions that are likely to occur in the near future. Every business is affected by the conditions of the c community in which it is located.
We should not be under the impression that only business conditions influence the general business. Political conditions, fiscal policy, controls, population, and national income etc. have a direct bearing on the business. So, it is necessary for the manager to take into consideration all these factors while forecasting the prospects of his enterprise.
Sales Forecast:
This type of forecasting decides the fate of the organization as the sales determine the success of the company. Therefore, sales forecasting should be undertaken with due care and precaution so as to see that whatever planning department has decided is carried out to promote the sales. It is from this point of view only that sales forecasting has been deemed to be as a guiding factor in planning an important aspect of the organizational setup.
In this connection O’ Donnell points out that,
“It is the sales forecast that must set the stage for internal planning, business expenses, capital outlays. Policies of all kinds are made the purpose ordinarily of maximizing profits obtainable from expected sales, whether this forecast is for a period of months or for a period of years; it is the key to future business plans.”
Capital Forecast:
Every business enterprise will have to think of its financial plans. It should be determined so as to meet the needs of the company. With this object in view, forecasting of capital requirements has become a necessity and is taken as a primary step in the organization.
In every business concern, the capital is required not only to meet fixed and working capital but also for depreciation, replacement, development, reorganization etc. Thus accurate forecasting helps the organization to employ its capital to the fullest extent and can get the optimum returns on its investment.
The Need for Business Forecasting:
Some of the important needs of business forecasting are listed below:
Production Planning:
The rate of producing the products must be matched 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 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 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 manager 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 are often called as projections. These are helpful not only for planning and public policy making, but they also include likely economic environment and aid formulation of business policies as well.
Workforce Scheduling:
The forecast of monthly demand may further be broken down to weekly demands and the workforce may have to be adjusted to meet these weekly demands. Hence, forecasts are needed to enable managers to get tuned 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 for the purpose of making 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 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.
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 is 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.
Trade cycle increase the risk of business; create unemployment; induce speculation and discourage 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, 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.
