Meaning of Forecasting
Forecasting is the process of estimating the relevant events of the future, based on the analysis of their past and present behaviour. The future cannot be probed unless one knows how the events occurred in the past and how are they occurring presently. Thus the past and present analysis of events provide information about their future occurrences. Since forecasting may need various statistical techniques, some people equate this analysis with statistical analysis.
Definition of Forecasting
According to Neter and Wasserman, “Business forecasting refers to the statistical analysis of the past and current movement in the given time series to obtain clues about the future pattern of those movements”.
According to Louis A. Allen, “Forecasting is a systematic attempt to probe the future by inference from known facts”.
According to American Marketing Association, “Forecasting is an estimate of sales in dollars or physical units for a specified future period under a proposed marketing plan or program and under an assumed set of economic and other forces outside the unit for which the forecast is made. The forecast may be for a specified item of merchandise or for an entire line”.
According to Fayol, “Forecasting is the essence of management. Its techniques are used in every type of organisation may it be government or private, production or service and social or religious”.
Forecasting is the process of predicting the future. Whether it is predicting future sales, demand, or production, forecasting is an important yet unavoidable task that is an integral part of almost all business activities. Demand forecasting is essential for a firm to produce the required quantities at the right time and arrange well in advance for various inputs. Forecasting helps a company to assess the probable demand for its products and plan its production accordingly.
Need of Forecasting
The need and importance of forecasting can be found with the help of the key role played for forecasting in the management process, especially in the planning process. Whatever planning is done by the management executives, their planning has to be based on forecasting.
Forecasting helps the management in the following given ways:
1) Promoting Business: While promoting a new business, the promoters must know how the various factors in the environment will affect promotional activities over some time. They must forecast what will happen in future, and what risks are involved if an action plan is drawn based on forecasting results. If the promoters are satisfied that the risks involved are worth taking, they may take up the plan, otherwise, it is a blind jump into the future. Thus forecasting provides the basis for the promotion of a business.
2) Effective Planning: Forecasting is an essential ingredient of planning. Without it, planning is not possible. Planning decides the future course of action which cannot take place in a vacuum but certain circumstances and conditions are predicted by the forecasting procedure. Based on events that happened in the past and which are being occurred in the present forecasting decides what will happen in future with the help of some techniques.
The planning structure is founded based on that future event. It provides the knowledge of various planning premises within which managers may analyse their strengths and weakness and may take appropriate actions in advance before they are put on the market. Planning decides the course of action based on forecasting. future events are projected, managers may make necessary changes in the plan and may sail smoothly.
3) Implementing Project: Many entrepreneurs implement a project on the basis If of their experience. Forecasting helps an entrepreneur gain experience and ensures his success. In this way, forecasting is an important factor which enables the entrepreneur to get success.
4) Coordinating: Forecasting provides the way for effective coordination though indirectly. In the forecasting process, information is required which is collected from internal as well as external sources. All units/departments are involved in this process. It provides interactive opportunities for better unity and coordination in the process of planning.
5) Controlling: Forecasting provides relevant information for exercising control. The information supplied by different units in the organisation is used in forecasting. It presents the actual performance while forecasting the future. The managers may come to know their weaknesses which may be overcome by taking corrective measures.
6) Achieving Success: The common phenomenon of ups and downs in the business involves uncertainties and risks, which affect the profits of the business. Risks depend upon future happenings and forecasting provides help to overcome the menace, the managers may take alternative action to avoid the risks and thus save their business from untoward happenings. Thus forecasting insures future risks. Though it cannot check the future happening, it may provide clues about it and indicate when the alternative action may be suitable.
7) Achieving Objectives: An organisation is established to achieve certain objectives which may be achieved by performing certain activities. The type of activities depends very much on the expected outcome of these activities which in turn depends on future events and how these activities are being performed. Therefore, forecasting future events is relevant to achieving the objectives.
8) Improving the Quality of General Management: Forecasting is based on thinking and rethinking the problems to be faced by the management in future, based on past experiences. Thus it helps in the development of the mental faculties of the managers.
Managers choose to identify one alternative out of several alternatives available based on forecasting. They think of the strengths and weaknesses of each alternative and decide which one is the best in the current circumstances. They decide what action they would prefer if the circumstances change. Thus, forecasting develops the mental faculties of managers.
9) Helping Every Aspect: Thus forecasting helps every aspect of management. It is the basis of planning. It is the first phase in the process of management. The success of the business depends on forecasting.
Process of Forecasting
The forecasting period may be short-term or long-term. In either case, certain stages or steps have to be passed through while making the forecast. These stages or steps are briefly discussed below:
1) Thorough Preparation of Foundation: Detailed investigation and complete analysis of the company are necessary for forecasting. Forecasting is based on the organisational structure of the company and its past performance. The growth of a company or a business is assessed over some time and the factors responsible for such are identified. Besides this, the extent of the dependence of one factor on other factors which ensure the growth of a company has to be studied. The very objective of the thorough preparation of a foundation is that the forecasting is based on the foundation.
2) Estimation of Future: The prosperity of the future can be estimated with the help of experience and performance as well as the talents possessed by top management executives. The brightness of the future period can be estimated in consultation with the key personnel and it may be communicated to all the employees of the business unit. This type of communication will help the management to fix the responsibility of each employee fulfilling the promises of this forecast and accountability for any deviations from this forecast.
3) Collection of Results: All the information can be gathered. Relevant records were prepared and maintained to collect the results. Nothing can be omitted and irrelevant information can be avoided while collecting the results.
4) Comparison of Results: The actual results are compared with estimated results to know deviations. If there are significant deviations between the estimation and actual results, the reasons for such deviations can be investigated. This will help the management to estimate the future (forecasting).
5) Refining the Forecast: The forecast can be refined in the light of deviations which seem to be more practical. If any factors or conditions have changed during the period of understudy, then those factors or conditions have to be taken into consideration for future estimation. In this way, the forecast can be improved and refined.