Forecasting - Definition & Importance
What is Forecasting?
Forecasting is a method to estimate the future variables from a business perspective. Forecasting or projections can be for any variable for example product sales, revenue stream, market demand or for our consideration sales volume. Forecasting can never be absolute rather they represent an approximate image of how the variables might behave in the future.
Importance of Forecasting
Forecasting is extremely important from the business perspective as the production facility, marketing plans, forecasting sales, operational activities all can be pre-planned to fulfill the future demand. Future demand can only be known by projecting the variables of demand by looking at the past data of the market.
Sometimes the past data for a relevant company is not available, for example startups, in those cases the past data of the particular sector or industry of the company is observed and forecasting is made according to the similarity in the offering of that company with the industry or sector offering. Another method for projecting without past data is to survey for the company’s products.
The results of the survey could give an insight into how the public is reacting for the product and those qualitative or quantitative variables can be fed into any forecasting software to get a rough projection about the future demand.
The degree of relevance of a certain forecasting or market forecast is determined by how close the projection is to the actual value. This actual value is known as the true value in business terms and the projected value is known as the observed value after the projection has been observed in real time.
The goal is to minimize the difference between the true value and the observed value which is known as the error in the forecasting models. The lesser the error, more fit the model is for any business.
Forecasting Techniques
Forecasting has to be done qualitatively as well quantitatively because it is can prove very critical for business.
1. Qualitative technique.
Variables such as favorite music genre, taste preference, color preference. Prevalent techniques under qualitative technique are
a. Delphi method
b. Market research using survey
c. Sales Estimates & Executive Opinion
2. Quantitative technique.
Involving variables which can be numerically represented and measured. For example weight, height, length, depth. Prevalent techniques under qualitative technique are
a. Time series analysis. Techniques such as moving average, weighted moving average, exponential smoothening, cyclicity and trend line using scatter plots are used
b. Causal forecasting. This includes statistical models such as regression model, ANOVA, econometric model.
In the process of forecasting various seasonality are bound to occur in multiple models. These seasonality periods can be highly profitable if proper projections for the volume of production and market demand rate can be obtained much before the observation period. For example the forecasting of per capita income of a country based on macro-economic factors and past data. Through this research the company would be able to launch such products which would be suitable for the wage levels and living standards of the residents of that country. Another example would be of the festivals and special occasions. Often demand of certain products or services peaks during particular festivals and occasions. These demands can be forecasted using industry average and past data to foresee the market behavior and volume of production can be managed as per the results.
Hence, this concludes the definition of Forecasting along with its overview.
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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