Tag: Forecasting

  • Forecasting: Definition, Elements, and Techniques

    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.

  • Importance, Advantages, Limitations of Business Forecasting

    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.

    Importance Advantages Limitations of Business Forecasting to Business
    Importance, Advantages, Limitations of Business Forecasting to Business. Image credit from #Pixabay.
  • Business Forecasting Techniques, Elements, and Steps

    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.

  • Business Forecasting Definition, Types, and Need

    Business Forecasting Definition, Types, and Need

    Explore business forecasting with insights on its meaning, definition, types, and the need of forecasting for strategic planning and informed decision-making. What is Business Forecasting? It 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.

    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 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.