Forecasting is a planning tool to develop assumptions or premises about the future uncertainty based on analyzing the present and past data available. In simple word, we can say the process of predicting the future based on analysis of most common trends of past and present is known as forecasting.
Forecasting starts with certain factors such as experience, knowledge, and judgment that help in making the future assumption.
1. Quantitative methods
2. Qualitative methods
Business forecasting is the process by which the business predictions are done. These predictions depend on the past and present information that is gathered from the different data of a company by the process of data analysis. Forecasting is basically a technique by which prospective view of different things are taken to make sure that the turn of things in the foreseeable future is in favour of the company. Usually, the future of any business is uncertain but the technique of forecasting helps bring some certainty.
There are ways in which the forecasting is done. Different companies take up different methods, but some basics are:
With regard to these two processes, forecasting can be simply defined as the analysis of the past and the future of economic conditions with the object of drawing as many accurate inferences as possible about the future businesses of the company. The entire process of forecasting is done with the purpose of making the management of the company aware of the future threats, and risk and be prepared for them and take decisions accordingly. Proper calculations of reasonable probabilities about the future are also done. These are all based on the analysis of the raw information and are tested by sound statistical econometric techniques. This tested information is then modified, interpreted and then applied in terms of an executive’s personal judgment and social knowledge of the business and the relevant industry trade. Forecasting in business can also be explained as the process of calculation of probable events that can be provided against the future. It involves a ‘look ahead’ in any business and helps in predetermination of events and understanding their financial implications as in the case of budgeting.
According to some scholars, Business Forecasting is the procedure of research that helps in discovering the relevant economic, social and financial influences that govern different business activity, that predicts or estimates current or future trends that can have an impact on company policies or future financial, production and several sales and marketing operations.
Forecasting is not an easy process and different steps are involved in it. They are also known as the elements of forecasting:
1. Developing the Basis of Forecasting: The first and the most important step of Forecasting involve the development of the basis of a systematic investigation of the economic condition of the company. Where the company is currently positioned and the products are placed on the market is looked upon. Based on all the information gathered from here, the future of the estimates of sales and general business operations are done. This is the general economic forecast and it marks as the primary step in the forecasting process.
2. Estimation of future operations of Business: This step is a second one and in this step the conditions and course of future events in the industry are estimated. The data and the information collected through investigation are made to be the basis of analysis and estimation of the future business operations.
3. Regulating Forecast: The forecast that are made are compared with several actual results of businesses in the company. This is done to determine the deviations and the reasons for all the variations of the results are ascertained so that in future there is no ifs and buts in taking the correct action.
4. Review of the Forecasting Process: The deviations in the forecast and the actual performance are looked upon, analyzed and then the improvements are made in the process of forecasting. Thus the process of forecasting is refined for improved forecast and results in the future.
The main component of Forecasting is the different relevant data and they have several sources as well. These data are gathered and analyzed to understand the current business scenario, without which no Forecast would have been possible.
Sources of Data: Any statistical investigation’s first step is always the collection of data. It is crucially the basis for any interpretations or relevant analysis. While collecting the data it should be crucially kept in the mind that the data is being collected from a relevant source, the reason of the data collection, the types and kinds of data being collected, which is collecting the data and in what form it is being collected. This plays a very crucial role in the processes of Forecasting and decides the methods and ease of Business Forecasting processes.
Primary Sources: Primary sources are those from where the investigator collects the first-hand data. Though it is costly and time-consuming to collect data from these primary sources, these data are the most worthy and reliable. These data are collected once the secondary data are not enough useful. Personal interviews, questionnaires or observations are used to get the data.
Secondary Sources: These are the data that refer to the already published ones or the data that are collected by other agencies. These are thus second-hand data and these data are just compiled and analyzed for Forecasting. A lot of care and caution are supposed to be put while using the secondary data. They are cheap, quicker to get and are easily available.
Business Forecasting though has become an essential task for most of the companies but it doesn’t only have advantages but disadvantages too. Some companies consider Business Forecasting as unnecessary and believe that this wastes a lot of time, money and energy. This is because a lot of times, even after a lot of precautions, elements of error do creep in. Guesswork in Forecasting is an essential part and in most cases that cannot be eliminated. Many times the Forecast is not clear and validated as it depends on the pessimistic or optimistic attitude of the Forecaster towards the Forecast. Forecasts are also not pi-point accurate at all times But overall the importance of Forecasting cannot be undermined and specially at a time like this where competitions are sky-rocketing with every second.
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