Forecasting

What is Forecasting? Meaning

Forecasting is a process of predicting or estimating the future based on past and present data. Forecasting provides information about the potential future events and their consequences for the organization.

It increases the confidence of the management to make important decisions.

 Forecasting is the basis of premising/planning.

 Forecasting uses many statistical techniques. Therefore, it is also called as Statistical Analysis.

Features of Forecasting

1.      Forecasting in concerned with future events.

2.      It shows the probability of happening of future events.

3.      It analysis past and present data.

4.      It uses statistical tools and techniques.

5.      It uses personal observations.

Importance of Forecasting

1.      Promotion of Organization

Organization wan s to achieve objectives

How? Performing some activities

Which activities? Based on expected outcome.

Expected outcome is related to future, so forecasting is needed to achieve objectives.

So a successful promoter forecast what will happen.

2.      Key to planning

Forecasting provides relevant and reliable information about the past and present events and the likely future events. This is necessary for sound planning. It is the basis for making planning premises.

Example: A steel pipe manufacturer find that gradually PVC pipes are coming in to market , with cheaper rate and they will replace steel pipes, so they take suitable action to overcome this problem. ie. Diversify their business by going into manufacturing of PVC pipes.

3.      Success in Organization

Each organization is characterized by risks. Risk is based on future happenings ie. Uncertain / unpredictable things.

Forecasting reduce uncertainty by providing clues about what will happen in the future.

Manager acts like a navigator. He cannot control sea tides, but he can take this ship at the right path if he knows them in advance.

4.      Confidence to managers

It gives confidence to the managers for making important decisions.

Limitations of Forecasting

Time and cost factor

The collection and analysis of data about the past, present and future involves a lot of time and money. Therefore, managers have to balance the cost of forecasting with its benefits. Many small firms don't do forecasting because of the high cost.

Not absolute truth

Forecasting can only estimate the future events. It cannot guarantee that these events will take place in the future. Long-term forecasts will be less accurate as compared to short-term forecast.

Based on Assumptions

Forecasting is based on certain assumptions. If these assumptions are wrong, the forecasting will be wrong. Forecasting is based on past events. However, history may not repeat itself at all times. There are various factors which determine the occurrence of an event. The behavior of these factors may change/unpredictable.

Eg: If the government increases taxes on certain commodities, their substitutes will be in high demand. The changes in tax structure cannot be forecast in all cases.

War between two countries can change the total business situations.

Managers judgment

Forecasting requires proper judgment and skills on the part of managers. Forecasts may go wrong due to bad judgment and skills on the part of some of the managers. Therefore, forecasts are subject to human error.

Steps in Forecasting

Procedure, stages or general steps involved in forecasting are given below:-

·        Analysing and understanding the problem : The manager must first identify the real problem for which the forecast is to be made. This will help the manager to fix the scope of forecasting.

·        Developing sound foundation : The management can develop a sound foundation, for the future after considering available information, experience, type of business, and the rate of development.

·        Collecting and analyzing data : Data collection is time consuming. Only relevant data must be kept. Many statistical tools can be used to analyze the data.

·        Estimating future events : The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.

·        Comparing results : The actual results are compared with the estimated results. If the actual results tally with the estimated results, there is nothing to worry. In case of any major difference between the actual and the estimates, it is necessary to find out the reasons for poor performance.

·        Follow up action : The forecasting process can be continuously improved and refined on the basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must be regular feedback on past forecasting.