Business Forecasting refers to a systematic analysis of past and present conditions with the aim of drawing inferences about the future courses of event. Forecasting is the essence of planning because planning also aims at deciding what is to be done in the future.
Definition of forecasting
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.
We observes that “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, specially, strategic planning which is long-range in nature.”
Features of Forecasting
Based on the above definitions the following features are explained below:-
1. Involvement of future events
Forecasting relates to future events. Forecast is the essence of planning because planning also aims at deciding what is to be done in the future.
2. Depends upon past and present event
Forecasting is made by analyzing the past and present relevant data. It takes all the factors into account, which affect the functioning of the enterprise.
3. Happening of future events
Forecasting defines the probability of happening of future events. Therefore, happening of future events can be precise only to a certain extent.
4. Makes use of forecasting techniques
As can be gathered from what has gone before that forecasting is a systematic attempt to probe the future with a view to drawing certain useful infer ness. Such a probing obviously demands a proper and full analysis of known facts with the help to various qualitative and quantitative forecast techniques.
Advantages of Forecasting
Forecasting is an important and necessary aid to planning and planning is backbone of effective operations. Thus the importance or advantages of forecast are stated below:-
- It enables a company to commit its resources with greatest assurance to profit over the long term.
- It facilities development of new products, by helping to identify future demand patterns.
- Forecasting by promoting participation of the entire organization in this process provides opportunities for team work and brings about unity and coordination.
- The making of forecasts and their review by managers, compel thinking ahead, looking to the future and providing for it.
- Forecasting is an essential ingredient of planning and supplies vital facts and crucial information.
- Forecast provides the way for effective coordination and control.
- The uncertainty of future events can be identified and overcomes by an effective forecast. Therefore, it will lead to success in organization.
Limitations of Forecasting
The following limitations of forecasting are listed below:-
- Basis of Forecasting
- Reliability of Past Data
- Time and Cost Factor
1. Basis of Forecasting
The most serious limitations of forecasting areas out to the basis used for making forecasts. Management may become so concerned with the mechanism of the forecasting system that it fails to question its logic.
Top executives should always bear in mind that the bases of forecast are assumptions, approximations, and average conditions.
2. Reliability of Past Data
The forecast is made on the basis of past data and the current events. Although past events / data are analyzed as a guide to the future, a question is raised as to the accuracy as well as the usefulness of these recorded events.
3. Time and Cost Factor
Time and cost factor is also an important aspect of forecasting. They suggest the degree to which an organization will go for formal forecast. The information and data required for forecast may be in highly disorganized form: some may be in qualitative form.
The collection of information and conversion of qualitative data into quantitative ones involves lot of time and money.
Type of Forecast
There are three types of forecast, on which many business organizations rely on are:
- Demand (Sales) forecast
- Economic forecast
- Technological forecast
1. Demand Forecast
Demand or sales forecasts are fundamental to a company’s planning and control decisions. They give the expected level of demand for the company’s products or services through some future periods.
2. Economic Forecast
Economic forecast involve such matters as future state of the economy; inflation rates etc, and have a profound influence on the success of future business activities.
3. Technological Forecast
Technological forecasts usually focus on the rate of technological progress or the nature of technological developments in areas related to the business and technology.
Elements of the forecasting process
J.W. Redfield describes the following elements of forecast process.
- Prepare the groundwork
- Establishing future business
- Comparing actual with estimated results.
- Refining the forecasts
1. Prepare the groundwork
The group work preparation requires a thorough study, investigations and analysis of the company, its products, its market share, its organizational structure and the industry.
The aim is to build a foundation on which future estimates can be based.
2. Establishing 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.
The forecast is developed with the participation of the key personnel and is officially communicated to all.
3. 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.
4. 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 in the estimates.
Difference between planning and Forecasting
Even though both planning and forecast are known as equals, there exists basic difference.
1.Planning is more comprehensive which includes many sub process and elements in order to arrive at decisions. These decisions may be in terms of what is to be done, and when to be done.
Conversely, Forecast involves the estimate of future events and provides parameters to the planning. It may also involve many sub process and elements but these are used to project what will happen in future.
2. Forcast may not require any commitment of action but may help in planning the future course of action, where as commitment of actions is the basic ingredient of planning
3. The major decisions in planning are made at the top level. But forecast is normally taken at middle level or lower level.
Forecasting plays a vital role in the process of modern management. Forecast can provide relevant information for exercising control. The management can know their weakness in forecasting process and they can take suitable action to overcome these.