What is Business Forecasting
Business Forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits. Forecasting has become an invaluable tool for businesspeople to anticipate economic trends and prepare themselves either to benefit from or to counteract them.
Basic Techniques and Methods of Business Forecasting
Various techniques of forecasting are used in the field of business because the future of any business can never be predicted with certainty.
- Similarity Events Method: or Historical analogy method. Example, in analyzing the changes in the attitude of employee regarding in equality, the management can find out prudential attitude of employee in the days to come by considering past attitude. The similarity of events of past and present is properly analyzed in order to make an effective forecast.
- Jury of Executive Option: Example, an opinion on profitability of starting a new unit is received from various experts and decision is made on the basis of experts’ opinion.
- Survey Method: Example, information may be collected through surveys about the savings habits of the public. Both quantitative and qualitative information may be collected.
- Sales Person’s Opinion: The sales force of the existing product can be forecast with the help of opinions of sales persons. Sales persons are very closer to the consumers and/or customers.
- Business Barometers: Index Numbers are used to measure the state of condition of business between two or more periods. Example, a pay rise to the government employees, industrial and agricultural employees may reflect higher sales volume and higher income after some time.
- Expectation of Consumer: known as “Marketing research Method.” A survey is conducted in order to know the future needs of consumers. An overall forecast can be made on the basis of the expectations of consumers.
- Time Series Analysis: In time series analysis, the future is forecast on the assumption that past activities are good indicators of future activities. In other words, future activities are the extension of the past. This method is quite accurate where future is expected to be similar to the past.
- Delphi Method:. A panel of experts is prepared. These experts are requested to give their opinions in writing for a prescribed questionnaire. Their opinions are analyzed, summarized and submitted once again to the same experts for future considerations and evaluations.
- Extrapolation: Extrapolation means estimation of future behavior from the known data (i.e.,) past behavior. Some of the factors are responsible for the behavior change. The reason is that it assumes that the effect of these factors is of a constant and stable pattern and would continue as such in future.
- Regression Analysis: Example,if we take two inter-related variables viz., cost of production and profit, there will be a direct relationship prevailing between these two variables. It is possible to have an estimate of profit on the basis of cost of production, provided other things remain the same.
- Input and Output Analysis: Under this method, a forecast can be made if the relationship between input and output is known. Example, power requirement of the country can be forecast on the basis of its present usage rate in various sectors viz., industry, transport, household etc., and on the basis of how the power requirements of these various sectors will increase in future.
- Econometric Models: It is otherwise called causal models. The complex relationship of various variables is responsible for the future behavior of one variable. Example, sales is affected by many variables, say, time, changes in personal disposable income, changes in preferences, availability of substitute products in the market, credit availability, changes in life style and the like. All these variables have produced some effects on present sales in addition to past sales. This forecasting technique is applied in projecting Gross National Product. Here, the past data have been used to know the degree of relationship prevailing among these variables.
How to know what technique to use :
- These are some of the forecasting techniques. These techniques, broadly, can be divided into two categories viz., Qualitative techniques and Quantitative techniques. Qualitative techniques are based on human judgment. The reason is that there is no availability of sufficient information and data.
- If sufficient information and data are available, quantitative technique can be applied to forecasting. Qualitative and Quantitative may help in forecasting the unexpected future events or happenings or opportunities or threats. But, a quantitative technique does not make any provision for finding out the unexpected occurrences.
Factors To Be Considered for choosing the Techniques :
- The purpose of forecast
- The degree of accuracy desirable.
- The time period to be forecast.
- Cost and benefit of the forecast to the company.
- The time available for making the analysis.
- Component of the system for which forecast has to be made.