Business forecasting is the process of estimating future economic conditions based on past and present information. It refers to the technique of taking a prospective view of things likely to shape the turn of things in the foreseeable future. As the future is always uncertain, there is a need for an organized system of forecasting in a business.
Definition of Business Forecasting
According to C.E. Sulton, “Business Forecasting is the calculation of probable events, to provide against the future. It, therefore, involves a ‘look ahead’ in business and an idea of predetermination of events and their financial implications as in the case of budgeting.”
Process of Business Forecasting
- Understanding the Problem: The first step in the forecasting process is the understanding of the real problem about which forecasts are to be made. A manager must know clearly the purpose of forecasting. Forecasts may be made regarding technological conditions, sales, choice of people, availability of finance, and so forth. A clear understanding of the scope of forecasting will help the manager to probe the relevant information only.
- Developing the Groundwork: In this stage, the manager will try to understand what changes in the past have occurred. He can use the past data on performance to get a speedometer reading of the current rate (say of sales or production) and how fast this rate is increasing or decreasing. This will help in analyzing the causes of changes in the past.
- Analyzing Data: There is a definite relationship between the choice of statistical facts and figures and the determination of why business fluctuations have occurred. Statistical data cannot be selected intelligently unless there is a proper understanding of the business fluctuations. The reasons for business fluctuations will help in choosing the relevant information. After selecting the data, they are analyzed in light of past changes. Statistical tools can be used to analyze the data.
- Estimating Future Events: The process must know clearly what he expects in the future in the light of overall organizational objectives. It should estimate future business from several probable trends revealed by the systematic analysis of data. The estimated results can be compared with actual results in the future. This will help in refining the process of forecasting.
- Implicit vs. Explicit Forecasting: Forecasting may be either implicit or explicit. When a manager makes forecasts based on his experience and intuition, he is said to be implicitly forecasting future events. This approach is generally not successful because it is unsystematic, not very reliable, not very precise, and not very accurate. Implicit forecasts cannot be rationally evaluated and so cannot be used as a rational basis for planning and control. Therefore, it is generally more useful to consciously forecast and develop explicit planning premises. Explicit forecasts are systematic and are likely to be more reliable, precise, and accurate. They can be used as the basis for rational analytical evaluation and also for control purposes. The various techniques of explicit forecasting have common into existence. They include time series analysis, regression analysis, and econometric models.
Importance of Business Forecasting
- Essence of planning
- Exactness in decision-making
- Implementation of project
- Contribution to business success
- Developing coordination
- Smooth working of an organization
- Development of a business
- Comitative advantage
- Increasing Profits of Organization.