There are various future risks and problems associated with the business. These risks are inherent in the business and cannot be eliminated. This is because the future is uncertain and anything could happen at any time. To cope with this uncertainty or to be prepared for the uncertain future, businesses try to predict the upcoming future, related threats and changes in the external environment. This method is known as business forecasting.
Business forecasting refers to the techniques, methods, ways, or tools that are used to predict development in a business. These developments may be related to sales, expenditure, profits, innovations, and upcoming trends. The main motive behind business forecasting is to develop better strategies for the upcoming and uncertain future based on information related to areas of concern. In business forecasting, past information is collected and analyzed to find similarities or a pattern that can be used to predict the future, any related threat, or upcoming changes in the future. All the business processes such as demand planning, financial planning, operational planning, future production, marketing and sales development are identified and developed after the business forecasting process. This process lays down the foundation of all other business processes by predicting the needs of the future and the steps to be taken.
Types Of Business Forecasting
There are mainly three types of business forecasting which are used by a business to forecast a situation according to the needs of the organization. These are: general forecasting, sales forecasting, and capital forecasting.
General business forecasting
It is the most common forecast, which is used by every business to forecast various conditions prevailing in its environment and the changes that are taking place or might take place in the future. Every business is affected by the regular and frequent changes taking place in the internal as well as external environment. So, it becomes necessary for every business enterprise to undertake a general business forecast to get itself ready for any kind of change. Before formulating a general forecast, it is very important for a business to take into consideration various political conditions, fiscal policy, controls, population, and national income.
As the name suggests, it is a forecast related to sales of an organization. This forecasting decides the growth, future, profits, and revenue of the business as everything is interconnected with the sales of an organization. Therefore, it uses various precautions, care, and precautions while formulating a forecast related to sales. Sales forecasting is also important and crucial for business planning. It is sales forecasting that determines the business expenses and capital outlay of a business enterprise.
Capital forecasting is the predictions related to the capital requirements and capital outlay of an enterprise. It helps a company decide what its capital requirements will be to meet its commitments and other needs. Capital is not only required to fuel the work of an organization but also to meet fixed capital needs, financial needs, depreciation, replacement, and other events or issues. An accurate capital forecast helps the business to meet financial needs as and when they arise and avoid any kind of shortage of funds.
Techniques Of Business Forecasting
Techniques are basically methods or a set of procedures that are used by a business to make forecasting easy. These techniques are not accurate but give a broad view of what can happen in the upcoming future. There are mainly two types of business forecasting techniques:
- Quantitative techniques
- Qualitative techniques
Quantitative forecasting are long term techniques that is used to determine the future for a long period of time. These techniques are based on measurable data such as statics, historical data, static charts, etc. In these types of techniques, past data and performance are assessed to identify the trends prevailing in the market and the upcoming changes.
Quantitative forecasting techniques use three methods or approaches to forecast upcoming business situations. These are:
- Trend analysis method
The trend analysis method, or time series analysis, is a forecasting technique that uses past data, events, and activities to predict the future. It helps to forecast what a situation or trend might have had in the past, and what its possible impact should be in the future. This method is very useful and relevant in situations where a company has a large historical or statistical data set that shows growth, sales, revenues, trends, or changes in policies in the past years.
- Econometric modeling
This is a forecasting technique based on mathematics and calculations. In this technique, multiple regression equations are formed, analyzed, and calculated to test the consistency of various data sets available. It also helps in calculating the accuracy of various data, their significance for the company, how they are useful to predict economic and financial situations, and their potential effect on the growth of the company.
- Indicator approach
This forecasting technique is based on reading and analyzing various indicators. In this technique, a relationship is established between certain indicators and the leading indicator to find out the performance of lagging indicators. Afterwards, a proper analysis is made to find out past deviations and take corrective measures to not repeat the same mistakes in the future. Also, lagging indicators represent the failures of business performance and provide valuable insights for the future.
Qualitative techniques are short term and based on industry markets or market mavens. These techniques are used where long term forecasting techniques are ineffective and unapproachable. There are two methods which are mainly used in qualitative techniques. These are:
- Market research
Market research means analyzing and viewing the trends in the market, customers’ needs and preferences, competitors’ strategies, and other factors that affect the market quickly or frequently. It involves conducting research on current situations in the market, identifying the changes taking place at a rapid speed and analyzing the increase or decrease in consumption. After the research, proper actions are taken so that the business can adapt to the changing environment.
- Delphi model
It is the most common and widely used method in which a panel of expert and experienced people is polled and their opinions are recorded regarding various topics and changes related to the business environment. After viewing and taking into consideration all the important aspects, predictions are made and forecasting is done.
Steps Involved In Business Forecasting
Business forecasting is a process that involves a series of steps that are to be followed wisely to make forecasting successful and work. The following are the steps involved in business forecasting:
Understanding the problem
It is the first and foremost step involved in business forecasting. It involves a proper understanding of the problems related to business. It includes a proper estimation of past problems that the business has faced and the problems that it might face in the foreseeable future. A business manager must understand the problems related to sales, marketing, and the availability of finance to make any forecast. The clear understanding of various issues and related problems is the basis of forecasting.
Developing the groundwork
In this step, the manager tries to analyze and understand the events and problems that have already occurred in the past. Afterwards, he uses this information to interpret the forecast and whether this forecast has a positive or negative impact on business. The main motive of this step is to analyze the causes of problems that were experienced in the past and not to repeat them in the future.
Selecting and analyzing data
There are various types of data available to a business enterprise related to its several functions, policies, sales, marketing, and revenue. The business tries to establish a relationship between this data and finds a pattern that follows. Afterwards, this relationship was analyzed carefully and forecasting took place.
Estimating future events
After considering the past events and data, businesses estimate and analyze the future events that might happen or take place. Here, a manager, along with the past information, uses his personal experiences related to the past to estimate the future. He must be prudent enough to understand and analyze what events may happen in the future and what are their possible consequences in the business.
Need For Business Forecasting
Business forecasting is inherent in all organizations. Without it, no other process can take place in an organization. It provides predictions not only for planning but also for sales, marketing, human resources, and all other aspects of business. Some of the crucial points which lay down the need for business forecasting are:
The production carried out within an organization should meet the demands and needs of the customers. It may happen that at times this demand is fluctuating creating a huge or small outflow of the product as consumption rate often changes. So a business manager needs to forecast the need for production accordingly, thereby decreasing the chances of excess or low production situations. With the help of business forecasting, a manager can easily forecast the production.
Financial forecasting is one of the most important aspects of any business. Finance is not only required to meet the working and fixed needs of an organization but also to meet uncertain situations, losses, and risk. Forecasting the financial needs allows a business to meet the cash inflows and outflows requirements along with other expenses. A manager should be prudent, wise, and futuristic while forecasting.
Forecasting helps in the study of various areas related to economics, such as population, total income, employment, savings, investment, public revenue, public expenditure, and many more, thereby making economic planning easy, fast, and accurate. Forecasting with the help of these variables enables a business to meet various economic situations in an effective manner. It helps a business to be ready for regression, inflation and other economic crises. Business forecasting also helps to make various policies related to the public, socialization, and the environment.
Workforce scheduling and handling
Business forecasting enables a business enterprise to meet the requirements of fresh talent in the organization as and when required. It also helps to handle various problems associated with employees and problems that may occur in the future, such as strikes. Business forecasting also helps to maintain a balance between demand and supply for the workforce.
A business at many times has to make various difficult decisions according to the current scenarios. Forecasting provides relevant and required information to the organization, which makes the decision process a simple one. Forecasting reduces uncertainty and provides all the related and possible consequences of a particular decision.
Advantages Of Business Forecasting
Business forecasting helps an organization in various ways to develop various ways to face the unpredicted and uncertain future. The following are some of them.
Focuses on future
Business forecasting is totally based and focused on the future. It helps in determining the future conditions, situations, and events that may take place. It continuously thinks about the future and what is going to happen in the future. Thus, it helps a company to think thoroughly and wisely about its future.
Focuses on customer satisfaction
Business forecasting involves a proper analysis of the needs, requirements, and preferences of customers. It allows a business to find and search for what a customer’s demand is and how to fulfill it. Therefore, it enables a business to provide greater customer satisfaction as compared to its competitors.
A business forecasting always takes into consideration the risk element, whether it is business risk or financial risk. It predicts or forecasts the risks that may arise in the future and helps a business prepare better to deal with them. It enables a business to develop methods, policies, and ways to handle any kind of risk. It provides businesses with various options that, in a particular situation, what possible steps they can take to minimize the risk.
Allows learning from past mistakes
Business forecasting enables an organization to look into the past and learn from its mistakes. It lets a business know what mistakes have been made in the past and should not be repeated in the future. It prevents you from taking such decisions, which have caused a huge loss or problems in the past.
Disadvantages Of Business Forecasting
Forecasting is an amazing tool that helps a business organization predict its future and make it brighter. But, sometimes business forecasting does not work at all. This is because it has some disadvantages which make it less effective. The following are the disadvantages of business forecasting:
Forecasting is never accurate
One of the biggest disadvantages of forecasting is that it is never accurate. It is only an assumption based on imagination and past data. Past data can be accurate in not repeating the same mistake again, but it fails to accurately predict what is going to happen in the future. Even if you have experienced and knowledgeable people who forecast business situations, you still cannot rely completely on their predictions.
Forecasting is a very time consuming process as it requires gathering of several past information, checking the accuracy of information, analyzing it, grouping of similar data, finding relationship or pattern among them and afterwards judging and making interpretations. This takes a lot of time. In fact, gathering all relevant data from several departments and processes and analyzing and grouping them takes a lot of time, which the rest of the process cannot take.
Business forecasting is a costly process as it includes different costs such as the cost of gathering information, the cost of checking its accuracy, the cost of making interpretations and forecasting.
Business forecasting is a very important process as it helps an organization predict the uncertain future and develop itself to face any crisis or risk. Although forecasting is never accurate, it still helps business enterprises a lot to make assumptions related to the opportunities and threats in the future. However, it depends on the size of the organization whether it wants to include business forecasting in its operations or not.