INTRODUCTION
Forecasting is a strategy for predicting significant future occurrences and issues based on previous and current behaviour or events. Without understanding what has happened in the past and what is happening now, the future cannot be predicted. Thus, forecasting entails a thorough examination of previous and current events in order to form a clear picture of what will happen in the future.
As a result, forecasting may necessitate the application of multiple statistical methodologies. Simultaneously, not all forecasts need the same statistical analyses or approaches. In order to form conclusions about future occurrences, forecasting requires an understanding of previous events and current situations.
MEANING
Forecasting is the process of predicting the future path of events using historical and current data.
Forecasting serves as a foundation for planning. Forecasting is necessary for planning. Forecasting, according to Fayol, is both analysing the future and creating plans for it.
DEFINITION
Neter and Wasserman state that, “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.”
Webster’s New Collegiate Dictionary defines that “A forecast is a prediction and its purpose is to calculate and predict some future event or condition.”
FEATURES OR CHARACTERISTICS
On the basis of the above definitions of forecasting, the following features or characteristics of forecasting can be identified.
- Future occurrences are the focus of forecasting.
- The planning process requires forecasting. Without anticipating, planning is impossible.
- Future occurrences must be taken into account throughout the planning phase.
- Forecasting is speculating on what will happen in the future. As a result, only a portion of what could happen in the future can be predicted.
- Scientific forecasting draws inferences or conclusions from previous and current relevant occurrences.
- Forecasting takes into account all of the elements that influence organisational functioning.
- Scientific, mathematical, and statistical approaches may be required for the examination of diverse aspects.
Personal observation is also beneficial to predicting. - Using scientific, mathematical, and statistical procedures to arrive at results is far more dependable than using common instruments.
FORECASTING PROCESS
Forecasting period may be a short-term or long-term. In either of the cases certain stages or steps have to be passed through while making the forecast. These stages or steps have been briefly discussed below.
1. Thorough Preparation of Foundation: Forecasting necessitates a thorough research and analysis of the firm. Forecasting is based on the company’s organisational structure and prior performance. A company’s or a business’s growth is evaluated over time, and the elements that contribute to its growth are determined.
Aside from that, the extent to which one component is dependent on other aspects that assure a company’s growth must be investigated. The basic reason for meticulous foundation preparation is because forecasting is reliant on the foundation.
2. Estimation of Future: The future success of a company may be predicted using prior experience and performance, as well as the skills of senior management leaders. The brightness of the future era can be estimated in conjunction with key persons and conveyed to the whole business unit’s workforce. This form of communication will aid management in determining each employee’s responsibility for delivering on the forecast’s promises, as well as accountability for any deviations from the prediction.
3. Collection of Results: All of the data may be gathered. To collect the results, relevant records are created and maintained. Nothing can be left out, and extraneous data must be avoided when compiling the data.
4. Comparison of Results: Actual and projected data are compared to determine variances. If there are considerable differences between the estimated and actual findings, the causes of these differences can be examined. This will aid management in anticipating the future (forecasting).
5. Refining the Forecast: In the light of more actual deviations, the forecast can be fine-tuned. If any circumstances or situations have changed throughout the understudy period, such factors or conditions must be taken into account when estimating the future. The prediction may then be fine-tuned and enhanced.
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IMPORTANCE OF FORECASTING
The relevance and need of forecasting may be determined by looking at the vital function forecasting plays in the management process, particularly in the planning process. Whatever planning is done by management executives, it must be based on forecasting. Forecasting assists management in the following ways.
1. Pivotal Role in an Organisation: The backbone of an organization’s efficient operation is planning. Many businesses have collapsed as a result of a lack of or incorrect forecasting. The reason for this is that planning relies on precise forecasting.
According to Louis A.Allen,“A systematic attempt to probe the future by inference from known facts helps integrate all management planning so that unified overall plans can be developed into which divisional and departmental plans can be meshed.”
2. Development of a Business: The purpose of starting a business is to attain certain goals. Certain actions can be used to attain the given objectives. The success of these initiatives is dependent on accurate forecasting. As a result, a company’s or organization’s growth is entirely dependent on forecasts.
3. Implementation of Project: Many entrepreneurs complete initiatives based on their prior expertise. A business owner may gather experience and ensure success through forecasting. Forecasting is a critical component of an entrepreneur’s ability to thrive in this manner.
4. Primacy to Planning: The future path of action is determined through planning. Forecasting is necessary for planning. Forecasting provides the knowledge needed for planning. As a result, forecasting takes precedence over planning.
5. Co-ordination: Indirectly, forecasting aids management leaders in successful cooperation. Forecasting aids in the gathering of data on internal and external issues. As a result, the information gathered serves as a foundation for coordination.
6. Effective Control: Forecasting allows management executives to determine the strengths and weaknesses of subordinates or workers. The executive can then take action against the subordinates. Forecasting can thus give sufficient information for effective control.
7. Key to Success: Every corporate organisation is at danger. Success is the result of taking chances and working under pressure. With the use of forecasting, risks and uncertainties might be eliminated. Risks and uncertainties are revealed through forecasting. By taking right measures, management leaders may salvage the company and achieve success. As a result, predicting is essential for success.
AREAS OF FORECASTING
The corporate climate of future is influenced by today’s decisions. As a result, the choice should be sound. With the aid of methodical and reasonable forecasting, a smart decision may be made. Forecasting is also an important aspect of effective management. For effective management, accurate projections are required. As a result, accurate forecasting is critical in the following domains.
1. Competition: It is vital to anticipate the strategies used by rivals. Low-cost strategies include awarding credit, enabling discounts, providing an extended guarantee term, and providing free content.
A new business unit might enter a market. For predicting, each competitor’s market share must be taken into account. Forecasting assists management in increasing the company’s market share.
2. Supply of Labour: The structure of the labour supply is shifting. Skilled employees, semi-skilled workers, and unskilled workers are the three types of labour available. Skilled employees are in great demand. Skilled employees are assigned to jobs that need a high level of expertise.
The availability of labour force can be predicted by management. There is a demand for specialised workers in today’s rapidly increasing digital environment. It signifies that specialists (skilled personnel) are needed to do a task effectively. If the management has a strategy for expansion or modernization, the most important projection will be the labour supply. Without a sufficient labour force, no industry can develop or modernise.
3. Economic condition: Management can examine the financial situation of a company unit. The economic state of each company unit determines its strength. The word “economic situation” refers to things like cash flow, working capital requirements, and repayment ability.
Any unit’s working efficiency might be enhanced by the current economic situation. In other words, a favourable economic climate aids business expansion.
4. Growth Trend: A thorough examination of the business’s growth trajectory is also required. A growth trend projection assists management in determining the operational level. Any entrepreneur prefers the upward growth trend.
This might be accomplished by using forecasting. Failure to produce appropriate growth trend forecasts might put the company out of business.
5. Social Change: Consumer preferences, desires, and attitudes may shift. With the aid of accurate forecasting, the shift may be recognised. Changes are caused by convenience and comfort. Forecasting might foretell the convenience and conveniences that customers will enjoy in the future.
6. Political Change: Forecasting is also highly essential in the sphere of politics. The reason for this is that any political shift would undoubtedly have an impact on the seamless operation of any company unit. Changes in politics frequently result in changes in government policies toward business.
7. Technology: The introduction of new technology has the potential to alter an organization’s operations. As a result, projections foresee new technical breakthroughs.
An active organisation keeps up with practically all technological changes and embraces new technologies to improve work performance. Failure to predict technology might lead to the company’s demise. It will have a hard time surviving in the commercial sector.
8. New Laws and Regulations: For an organisation to run effectively, new laws and regulations must be carefully adopted. Consumer protection laws are becoming increasingly important. Any business’s monarch is the customer. New rules and regulations have an impact on how a firm operates.
FORECASTING TECHNIQUES OR TYPES OR METHODS
Because the future of any firm cannot be forecasted with precision, several forecasting approaches are utilised in the field of business. Accurate forecasting can help to lessen uncertainty.
However, there is no such thing as a generally applicable proper approach. In practise, many techniques can be used to improve predicting accuracy. As a result, several of the strategies are detailed farther down.
1. Similarity Events Method: It’s also known as the historical analogy approach. Forecasts are formed using this strategy based on historical occurrences that are the most comparable to present happenings.
For example, while analysing changes in employee attitudes toward equality, management might determine the prudential attitude of employees in the future by reviewing prior attitudes. In order to generate an efficient forecast, the similarity of previous and present occurrences is carefully examined.
2. Jury of Executive Option: Under this procedure, specialists’ opinions are solicited and only the most worthy are accepted. For example, many experts’ opinions on the profitability of beginning a new nit are sought, and a choice is taken according on the findings.
Your opinion might be in the field of sales, finance, or purchasing. There are several concepts that can be examined for practicality and profitability. Experts may be asked to remark on other experts’ opinions in order to reach a consensus. The management is aware of the reasons for favouring a certain expert’s judgement.
3. Survey Method: A field survey can be used to gather information on a group of individuals. For example, information regarding public gs habits might be gathered by surveys.
It is possible to collect both quantitative and qualitative data. Such data is useful for accurate forecasting. The survey approach may be used to anticipate demand for both new and existing items.
4. Sales Person’s Opinion: With the aid of salesperson thoughts, the sales force of an existing product may be forecasted. Salespeople are extremely near to consumers and er customers. As a result, the salespeople’s opinions are quite valuable. Based on the perspectives of salespeople, a fair sales trend may be forecasted.
8. Business Barometers: Index numbers are used to compare the state of a firm over several time periods. Index numbers are used to investigate company trends, seasonal changes, and evelical movements. The direction of the firm is indicated by the index numbers.
Aside from that, these index numbers provide some foreshadowing of future developments. A wage raise for government, industrial, and agricultural personnel, for example, may represent greater sales volume and earnings over time.
As a result, using the business activity index number to anticipate the future development of a firm is quite simple. Index numbers, on the other hand, do not guarantee success. The reason is that all types of business do not follow the general trend.
6. Expectation of Consumer: A survey is done in this approach to determine the future demands of customers. On the basis of consumer expectations, an overall projection may be produced.
An organisation can learn about consumer preferences, the influence of advertising on purchasing behaviour, and existing product flaws. “Marketing research Method” is another name for this.
7. Time Series Analysis: The future is forecasted in time series analysis on the idea that previous actions are excellent predictors of future activity. In other words, future activities are a continuation of previous activities.
When the future is projected to be similar to the past, this strategy is highly accurate. It is possible to use time series analysis. Only when the data is accessible for an extended period.
In a word, projections are based on the premise that the business factors influencing the company’s steady development or decrease would stay unchanged in the future.
8. Delphi Method: The Delphi approach was created by the Rand Corporation in 1969 to anticipate military occurrences. Then it was used in other sectors as well. A panel of specialists has been assembled.
These experts are asked to write out their thoughts in response to a questionnaire. Their perspectives are analysed, compiled, and resubmitted to the same specialists for further analysis and review. The writers of these opinions are not identified, ensuring that no expert is swayed by the views of others. This procedure is repeated until an unanimous view is reached.
The Delphi technique is beneficial when historical data is unavailable and historical data does not predict future occurrences. The Delphi technique is particularly effective for issues like as future petroleum and diesel demands, the anticipated or probable aftereffects of price increases, and the like.
9. Extrapolation: Extrapolation is the process of predicting future behaviour based on known data (i.e., previous behaviour). Some of the variables are to blame for the shift in behaviour.
The consequences of such diverse circumstances are taken into account here. The reason for this is that it believes that the influence of these elements follows a consistent and stable pattern in the future. It is essential that future behaviour be determined only after a thorough examination of previous behaviour.
10. Regression Analysis: The influence of changes in the relative motions of two or more interrelated variables is determined using regression analysis. To put it another way, a change in one variable has an impact on the other variables.
A variety of reasons contribute to the changes in variables in today’s business settings and scenarios. Regression analysis is quite useful in identifying the impact of such factors.
For example, if we pick two interrelated variables, such as cost of manufacturing and profit, there will be a direct link between them. It is feasible to calculate profit based on cost of production if all other variables stay constant. Forecasting can be done in this manner.
11. Input and Output Analysis: If the relationship between input and output is understood, this approach may be used to make a forecast. Simultaneously, input requirements may be forecasted based on output. In other words, input can be determined based on output requirements.
For example, the country’s power requirements may be forecasted based on current use rates in various sectors such as industry, transportation, and households, as well as how these sectors’ power requirements would grow in the future. It is feasible.
The reason for this is because numerous economic sectors are interconnected. Aside from that, the current interrelationships between various sectors of the economy may be determined.
12. Econometric Models: It’s also known as causal models. One variable’s future behaviour is determined by the complicated interaction between numerous variables.
For example, sales are influenced by a variety of factors such as time, changes in personal disposable income, tastes, market availability of alternative items, financing availability, and lifestyle changes.
In addition to prior sales, all of these elements have had an impact on current sales. The Gross National Product is projected using this forecasting approach. The degree of association prevalent among these factors was determined using historical data.
These are some examples of forecasting methods. These approaches may be classified into two types: qualitative and quantitative procedures. Human judgement is used in qualitative approaches.
The reason for this is because there is a scarcity of data and information. Quantitative techniques can be used to forecast if enough information and data are available. Quantitative and qualitative methods may aid in projecting unforeseen future occurrences, opportunities, or dangers.
Quantitative procedures, on the other hand, do not allow for the detection of unanticipated events.
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ADVANTAGES OF FORECASTING
A businessman can benefit from forecasting in a variety of ways. The forecast of future issues and occurrences will make it critical to attain goals as soon as possible. Some of the forecasting’s benefits or strengths are briefly addressed below:
1. Facilitates Planning: Forecasting makes management’s planning role easier. Forecasting gives a foundation for developing a potential plan. In the lack of foresight, planning will be difficult.
Planning necessitates the assessment of predicted future changes. Forecasting assists management in being careful of trade cycles and identifies management shortcomings. This will reduce the danger to the company. Forecasting makes planning easier in this way.
2. Ensures Co-ordination: An individual cannot forecast the future of an organisation. It need teamwork. This category includes all members of the organization’s departments. This fosters cooperation and fosters team spirit.
According to Henry Fayol,”The act of forecasting is a great benefit to all who take part in the process and is the best means of ensuring adaptability to changing circumstances, The collaboration of all concerned leads to a unified front, an understanding of the reasons and a broadened outlook.”
3. Easy Controlling: Forecasting aids management in maintaining control. If the actual outcome differs from the projected result, control is required. Control is not feasible in the lack of predicting; but, control will be a simple function in the presence of forecasting.
LIMITATIONS OF FORECASTING
- Forecasting should be based on specific assumptions and human judgments. False assumptions and human judgments will lead to incorrect outcomes.
- Forecasting is not a scientific approach for predicting future events since no precise link between past and future events is specified.
- Forecasting is held to an unrealistic standard. This will frustrate the executives and stifle their initiative.
- Forecasting demands a great level of competence, and the procedure must be carried out by experts. However, no such specialists are accessible for predicting in practise.
- Accurate and dependable data is required for accurate forecasting. Collecting trustworthy data is quite tough. As a result, accurate forecasting is impossible.
- Forecasting is the art of making predictions about the future. However, there is no guarantee that such occurrences will occur.
- The greater the number of days in the forecasting period, the greater the degree of inaccuracy. Forecasting cannot be used over a lengthy period of time.
- Forecasting comes at a high cost and takes a long time, but the advantages are not worth it. It takes a lot of time and money to collect information and convert qualitative data into quantitative data. As a result, smaller businesses cannot afford the expense and effort associated with forecasting.
DIFFERENCE BETWEEN FORECASTING AND PLANNING
Forecasting and planning are both concerned with future occurrences. Regardless of their distinctions, they are briefly outlined below:
Forecasting is a necessary component of the planning process. As a result, forecasting is used by everyone to organise their future actions. Forecasting allows for speculation about future events.
Henry Albers believes so,”A successful forecast is a rare occurrence that frequently occurs for the wrong reasons. Part of the difficulty is that people demand too much from predicting; they seek more exact answers than are attainable in an unpredictable environment. As a result, forecasts provide executives with instructions for appropriate planning.”
| SI NO | FORECASTING | PLANNING |
| 1 | Forecasting is basis for planning | Planning is basis for future course action. |
| 2 | Forecasting is essential for making any choice. | Planning aids in the development of predicting judgments. They concern what should be done, how it should be done, and when it should be done. |
| 3 | Forecasting is carried out by middle or lower management. | Planning is done at the top level of managemnent. |
| 4 | A few members are involved in forecasting process. | The planning process involves a vast number of people. |
| 5 | Employee activity is not stimulated by forecasting. | Planning promotes certain action in order to reach the organization’s goal. |
| 6 | Forecasting is a tool of planning. | Planning is not a tool of forecasting. |
| 7 | Forecasting is done by experts. | Planning can be done by any person. |
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