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Forecasting

Meaning
Forecasting is the process of predicting future conditions that will influence and guide the activities, behaviour and performance of the organisation. Business forecasting refers to analysis of past and current events so as to obtain clues about future trends in the business environment.

Definition Glueck: Forecasting is the formal process of predicting future events that will significantly affect the functioning of the enterprise. Louis Allen: Forecasting is a systematic attempt to probe the future by inference from known facts. The purpose is to provide management with information on which it can base planning decisions.

Features
1. Forecasting defines the probability of happening of future events. 2. Forecasting is done by analysing the past and present events relevant to the functioning of the enterprise. 3. Forecasting is a specialised activity use of several techniques. 4. Forecasts are made on the basis of internal and external data collected through informal monitoring and formal scanning of the environment. 5. The quality of forecasts depends on the reliability of information. 6. Forecasts may be made for long-term or short-term. 7. Forecasts can be of several types economic forecasts, sales forecasts and technological forecasts.

Planning and forecasting


Forecasting indicates the probable course of future events, plans decide how to prepare for these events. The information generated through forecasting serves as an input to planning.
Planning Planning is comprehensive elements and sub-processes Planning top level management Forecasting Forecasting involves estimates of future events and provides parameters to planning. Forecasting middle or lower level management.

Planning involves decision making.

Forecasting helps decision making by providing clues about what is likely to happen in the future.
Forecasting involves what the future is likely to be and is likely to behave.

Planning indicates what the future is desired and how to make it a reality.

Importance of forecasting (benefits) 1. 2. 3. 4. 5. Key to planning Means of coordination Basis for control Executive development Facing environmental challenges

Limitations of forecasting 1. Based on assumptions 2. Not absolute truth 3. Time-consuming and expensive

Steps in forecasting
Developing the ground work (Thorough investigation and analysis of various factors) Estimating future trends (intelligent guesses) Comparing actual and estimated results (to indentify causes for deviations and to take corrective action) Refining the forecast (by improvements in data and techniques over a period of time)

Techniques of Forecasting
1. Time series analysis: A historical series of data is decomposed into various components, viz., trend, seasonal variations, cyclical variations and random variations. After the original data are adjusted for seasonal and cyclical variations, a trend line can be fitted by using the method of least squares.

2. Extrapolation: On the basis of past behaviour of data, a trend curve is established.


3. Regression analysis: It is used to estimate the changes in one variable as a result of specified changes in other variables. Eg, correlation between advertising expenditure and sales volume.

4. Input-output analysis: Input requirement or output is estimated on the basis of known relationship between input and output. Eg, total quantity of petrol required in the country can be estimated on the basis of its usage rates in various sectors. Input-output analysis yields sector-wise forecasts. 5. Econometric models: Mathematical models are used to express in quantitative terms the inter-relationship among different variables. 6. Historical analogy: Forecast is based on some analogous conditions elsewhere in the past. 7. Business barometers: Index numbers used to predict the directions in which the economy is moving. Eg, GDP, consumer price index, IIP, BSE Sensex, etc.

8. Panel consensus method: Panel of experts opinions are combined and averaged.

9. Delphi technique: The minds of experts in the concerned area are probed systematically without and face-to-face contact.
10. Morphological analysis: Used mainly to forecast technological changes. It consists of identifying the relevant dimensions of the object, listing all varieties and combinations of these dimensions and finding practical applications for them.

Choice of a forecasting method: Factors Time period to be covered The cost of the forecasts Time available for forecasting Content of the forecast Desired degree of accuracy The relevance and availability of historical data.