Forecasting
- "Estimation or prediction of future" is refferred to as forecasting. The prediction of outcomes, trends,
or expected future behaviour of a business, industry secter, or the economy through the use of
statistics.
- Forecasting is an operational research technique used as a basis for management planning and decision
making.
- Meaning ↓
- Forecasting is a systematic guessing of the future course of events.
- Forecasting provides a basis for a planning.
- According to Henry Fayol, forecasting includes both accessing the future and making provision
for it.
Features of forecasting
- It is concerned with future events.
- It is necessary for planning process.
- The impact of future events has to be considered in the planning process.
- It is a guessing of future events.
- It considers all the factors which affect organizational functions.
- Personal oberviation also helps forecasting.
Process of forecasting
- Thorough preparation of foundation → the very purpose of thorough preparation of a foundation
is that the forecasting is based on the foundation.
- Estimation of future → the brightness of future period can be estimated in consultation with
the key personnel & it may be communicated to all the employees of business unit.
- Collection of results → relevant records are prepared & maintained to collect the result.
- Comparision of results → the actual results are compared with estimated results to know
deviations. This will help the management to estimate the future.
- Refining the forecast → the forecast can be refined in the light of deviations which seem to be
more realistic.
Importance of forecasting
- Pivot role in an organization → many organization have failed because of lack of forecasting or
faulty forecasting. The reason is that planning is based on accurate forecasting.
- Development of a business → the performance of specified objectives depends upon the proper
forecasting. So the development of a business or an organization is fully based on the forecasting.
- Co-ordination → forecasting helps to collect the information about internal and external
factors. Thus, collected information provides a basis for co-ordination.
- Effective control → Through forecasting, management can ascertain the strengths and weaknesses
of subordinates or employees.
- key to success → all business organizations are facing risks. Forecasting provides clues and
reduce risk and uncertainties. The mangement executives can save the buisness and get success by
taking appropriate action.
- Implementation of project → many entrepreneurs implement a project on the basis of their
experience. Forecasting helps an entrepreneur to gain experience and ensures him success.
- Primacy (foremost) to planning → the information required for planning is supplied by
forecasting. So, forecasting is the primacy to the planning.
Advantages of forecasting
- Effective handling of uncertainty
- Better labour relations
- Balanced work-load
- Minimization in the fluctuations of production
- Better use of production facilities
- Better material management
- Better customer service
- Better utilization of capital and resources
- Better design of facilities and production system.
Limitations
- Forecasting is to be made on the basis of certain assumptions and human judgments which yield wrong
result.
- It can not be considered as a scientific method for guessing future events.
- It does not specify any concrete relationship between past and future events.
- It requires high degree of skill.
- It needs adequate reliable information so difficult to collect reliable information.
- Heavy cost and time consuming.
- It can not be applied to a long period.
Methods of forecasting
Regression Analysis
- Regression analysis is used to find out the effect of changes of the relative movements of two
or more inter-related variables. In the modern business conditions and situations, number of
factor are responsible for the changes made in the variables.
- For example , if we take two inter related variables viz. cost of production and profit, there
will be a direct relationship prevailing between this two variables. It is possible to have an
estimate of profit on the basis of cost of production, provided other things remain the same.
Business barometer
- Index numbers are used to measure the state of business conditions between two or more periods.
Business trends, seasonal fluctuations, and cyclical movements are studied with the help of
index numbers.
Input and output analysis
- Under this method, a forecast can be made if the relationship between input and output is known
. At the same time, the input requirements can be forecast of the basis of output. In other
words, input can be determined on the basis of need of output.
Survery method
- Field survey can be conducted to collect information regarding the attitude of people.
Time series analysis
- This method is quite accurate where future is expected to be similar to the past. Time series
analysis can be applied. Only when the data are available for a long period of time.
Delphi Method
- Rand corporation has developed the Delphi method initially in 1969 to forecast the military
events. Then, it has been applied in other areas also.
-
Delphi method is useful when past data are not available and where the past data don’t give an
indication for the future events.