Business Forecasting : Meaning, Methods, Elements, Advantages and Limitations


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.

Elements of Business Forecasting

Development of groundwork

The first step in the forecasting is to dig up the information regarding the growth of the company, position of the company in the Industry, growth of the product lines of the organisation, etc. This calls for analyzing the internal as well as trend of various factors affecting the future performance of the organisation. Further estimates would be based on the efficiency with which the groundwork is done by the managers.

Forecasting the future course of business

Forecasting the future course of business is done by following a clear cut plan of future expectation of the total market in the industry, the proportionate share of the firm in the industry. On the basis of information gathered from analyzing past, projections about the future are made by the management by employing various statistical tools such as the method of least squares, semi-average method, moving average method, and exponential trend.

Comparing actual with estimated results

One of the important elements of forecasting is to compare the actual results with the estimated ones in order to see the deviations if any and analyse the causes of deviations. This would help in improving the quality of future forecasts.

Reviewing and refining the forecasting process

Forecasting is an ongoing process. No forecast is said to be the best one. There is always a room for improvement. Therefore in the light of experience gained, management should periodically review and refine the forecasting process. Of course, forecasting gets better and more accurate with practice only.

Advantages of Business Forecasting

  • Forecasting plays an important role in planning. In fact, plans are based on forecasts.
  • Forecasting helps the organisation to derive the benefits from the environmental changes (when the changes are favourable to the enterprise) and protect from the a d verse effects (when the changes are unfavourable).
  • Forecasting helps the manager to unify and coordinate the activities in the enterprise Accurate sales forecast is almost impossible in the absence of general business forecasting.
  • Forecasting tacilitates control by identifying the weak spots in the organisation. When once these weak spots are identified. It becomes easy for the managers to establish sign posts for effective control and sound planning thereafter.
  • Forecasting helps the enterprise in the achievement of objectives effectively and smoothly.

Limitations of Business Forecasting

Forecasts are just estimates of future conditions but not indicators of actual position. Future is never certain. Future is almost always shrouded by the shadows of uncertainty and it may be possible that the best laid plan may not yield fruitful results and bad plan may derive supernormal profits to the firms. it is near-impossible task for the manager to map out all the future possibilities and make the organization ready for encountering them. Uncertainty places a serious limitation to forecasting. Prophesying future events is a Herculean task indeed. Successful forecasts are, as many managers contend, a matter of chance.