Meaning Of Forecasting
The term forecasting is a technique of anticipating the future by taking into consideration past historical data and present data. Forecasting helps in decision-making in the organization, which helps in coping with future uncertainty. Forecasting provides the blueprint for upcoming events and enables businesses to plan their budget, the next step of progress in an organization. Forecasting enables the entity to make informed decisions no matter the type and size of the entity and the work it does. It’s a tool to predict trends in sales or consumer behavior. Forecasting, though, is an asset, but it requires expert knowledge and statistical data to accurately predict the future. Companies use this technique to determine their budget, their sales, and their future income and expenses.
Forecasting provides subtle benefits that enable the organization to achieve greater heights. A few benefits are:-
- Effective resource utilization
- A new business model can be established.
- Developing new business plans
- Management quality can be enhanced.
- The best decisions can be made by the management.
Types Of Forecasting
There are three popular methods for forecasting.
• Qualitative methods
• Analysis of time series
• Casual models
|Basis||Qualitative techniques||Time series analysis||Casual models|
|Method used||Delphi method||Moving average||Drift method, naïve method|
|Process||Market research||Exponential smoothing||Input output model|
|Source of data||Historical analogy||Trend projections||Life cycle analysis|
|Model||Visionary forecasting||Box-Jenkins||Econometric model|
Methods Of Forecasting
The other techniques are as follows –
Econometric forecasting or Moving Average
In the method auto – regressive integrated moving average model (ARIMA), the complex formulas of mathematics are used to show the past related information with the demand and the variables. The equation is tested and then applied to all future values that are predicted to be equal to the mean value of the last recent data.
The variance in the drift method is in the naval process, which involves decreases and increases in predictions over time known as drift fixed to the average change observed in historical records.
In the qualitative method, historical data is insufficient to provide evidence for future prediction or long-term decision-making in the company, as this method involves more of the consumers’ and professional experts’ judgment and personal opinion.
The future is predicted using previously collected historical data and the quantitative forecasting technique. This method is suitable for use only when the data collected in the past is reliable and its characteristics will be sustained in the future.
The Nave method
This method is used specifically for financial and economic time series. This method involves the use of previous months’ data and uses the data as the projection for the future without indulging in any attempts to adjust or attempts to identify causal factors.
Example Of Forecasting
Himalaya Ltd. wants to achieve YoY @ 6% for the next three years. The method used to explain the same is the straight-line method, in which the first step is to find the growth rate of the sales for a particular period.
|Historical||Year||Sales growth rate @ 6%||Revenue|
A company forecasting returns from the launch of a new product in the market –
Suppose a shoe manufacturing company wants to launch a new product – crocs. The product is new to the company, and the company has no official metrics for pricing the product and how the advertisement would be beneficial with this new launch. So the company needs to gauge the interest level of the target audience.
Here lies the concept of demand – establishing what the customer has the ability to pay, how much they are willing to pay, and how much investment the company needs to spend to cover its cost. With the help of demand forecasting, the manufacturing company will get an idea about the feasibility of the product and its pricing, which will enable the company to analyze what kind of demand exists and whether the product will perform well. Ultimately, this will help management make informed and sound decisions for production and sales.
Importance Of Forecasting
The market’s wants and desires are changing at an alarming rate, and thus there is a need for producers to change with the changing demand of customers. To get the most out of it, it is necessary to make appropriate predictions about the future, and uncertainty, and prepare a plan accordingly to the future happenings. Reasons why forecasting has the utmost importance:
Expanding into new markets
Forecasting is an essential element before entering into a new market or setting up a business in a new location. By forecasting, your potential customers can be targeted, your chances of succeeding in the new market can be determined with some accuracy, and risks can be curtailed to some extent.
Encourages collaboration and coordination
As forecasting is a group effort to achieve a common goal, so increasing the involvement of all parties in the process of predicting future events will increase collaboration and coordination in fast-changing conditions.
Planning consists of predictions. Forecasting is the basis of planning. Adequate planning, either short-term or long-term, in all instances, involves a considerable degree of projecting the future because of the prevailing conditions. Hence, both planning and forecasting are interrelated as it helps in planning the next process by providing a clear understanding of the measures that are needed to grow in the place. It helps to achieve short and long-term goals and also enables a spirit of teamwork and encourages good investment decisions.
Purpose Of Forecasting
Forecasting has several purposes. These are as follows:
• Forecasting bridges the time lag between the establishment of a company policy and its implementation.
• Forecasting is the foundation of business depreciation, which increases the effectiveness of a business plan.
• Forecasting aids in reviewing past and present company policies and predicting their future impact.
• Forecasting is an important component in decision-making because accurate decisions are not a problem.
Forecasting is a tool that enables businesses to take the necessary actions to achieve an ultimate goal by having access to past information and predicting future events, their frequency of occurrence, and their magnitude. Forecasting, depending upon its nature and information collected, is based either on subjective or objective results and mathematical equations and can be a quantitative or qualitative method. The best decision is taken by the management as it is the one who decides the forecasting policy and methodology. It is based on external and internal factors, controllable or not. The quantitative methodology depends on the models of mathematics derived from past information. Qualitative technology focuses on emotions, intuitions, past experiences, and values. Thus, forecasting is a vital procedure in businesses today which ensures the functioning is being operated effectively in the dynamic business environment.