Forecasting is the process of projecting future estimates from the given data or or factors of growth. This helps the companies to know the cash flows and the needs in the later periods.
There are two types of forecasting:
a) Top down fore casting
b) Bottom up forecasting
Bottom up approach follows the reverse approach for top down where we calculate the potential revenue by multiplying the potential sales and the average sales value. After evaluating the potential revenue of each product or product line, we calculate the revenue estimate of the entire firm.
Strengths of bottom up forecasting:
Focus on specific categories of expenditure, output and revenue which would be necessary to plan and manage other individual activities like production capacity, employee hiring/salary, advertising expenses etc.
Weakness of bottom up forecasting:
While forecasting, some errors at more specific levels (basic assumptions) can result into incorrect results or random patterns in the perspective of the firm. This may result in excessive spending or overestimating profits in the long run.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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