Methods of Business Forecasting

Meaning of Business Forecasting

Business forecasting is a technique of predicting the future trends using historical data. It is an in-depth analysis of past data for estimation of future business activities like expenditures, sales and profit. Business forecasting simply calculates probabilities of future events on the basis of analysis of present and past information. It is an efficient tool available with managers for making better plans and budgets for business.

Business forecasting uses data from two sources that are primary and secondary source for making future predictions. Primary source data refers to first-hand data that is collected personally by individuals using reporting tools. Data from a secondary source is a second-hand data which is collected by someone else but not by forecasters themselves. Business forecasting support decision making, production planning, financial planning, economic planning and workforce scheduling. 

Methods of Business Forecasting

Various methods of Business forecasting are as follows:

Direct or Bottom-up Method

It is a method under which each department of business collects information individually and performs their own forecast. Data collected by all department heads related to purchases, sales, production etc. is later on compiled together as the data of whole organization. Forecast performed by each department is later on clubbed together for preparing the forecast of firm as a whole.

Indirect or Top-down method:

Indirect method of business forecasting is just the opposite of direct method of forecasting. Under this, whole company/industry forecast is prepared first which is then used for preparing forecast of various departments or units of business. All departments get their share from the forecast of the whole company. Here, all estimation is done indirectly and all success of forecasting lies with top managers.

Historical Method

Historical method is one which depends on past data for calculating the future probabilities. Here past trends are analyzed and interpreted for having a better understanding of the present situation and prediction of future movements. Data related to past production, sales, capital needs, purchases etc. of a firm or a whole industry is used for doing analysis. Main drawback with historical method is that here whole prediction is based on past trends whereas future movements may drastically deviate from normal path projected by past trends.

Joint-opinion Method

Joint opinion is a method under which collective opinions and judgments of various experts are used for predicting future trends. Here a committee of experts is constituted who are assigned to prepare a forecast for business in consultation with each other. This is a simple and easy method which does not require detailed statistical analysis. It encourages cooperation and coordination as all experts’ pool their judgment for preparing a forecast of the company. Disadvantage with this method is that expert may not actively participate as they are aware that their judgment will not be final one. 

Deductive Method

Deductive method is one which takes into account only the current prevailing information for estimation of future trends. It is an opposite of historical method and does not consider any past information for analyses and forecasting purpose. Here all future trends are predicted on the basis of investigation and observation. Deductive method is dynamic in nature and lay more emphasis on latest developments than any past events.

Scientific Business Forecasting

This is a method where forecasting is performed on scientific lines using various statistical tools. Tools like Business index or barometer, Regression, Mathematical projection or extrapolation and econometric model are used for interpreting casual relationships. Here past data is modified and changed according to present prevailing situations using these tools. This modified data is then used as a raw material for making more accurate predictions about future.