BUSINESS FORECASTING

&
TIME SERIES ANALYSIS
 What is forecasting
• Forecasting is the process of making
predictions of the future based on past and
present data and most commonly by analysis
of trends.
What is business forecasting.
BUSINESS FORECASTING is an estimate or
prediction of future developments in
business such as sales, expenditures, and
profits.
Steps in forecasting
• Understanding why changes in the past have
occurred.
• Determining which phases of business activity
must be measured.
• Selecting and compiling data to be used as
measuring devices.
• Analysis of data.
Methods of forecasting
• Historical analogy method
• Field surveys and opinion method
• Business barometers
• Extrapolation
• Regression analysis
• Econometric models
• Lead leg analysis
• Exponential smoothing
• Input output analysis
• Time series analysis
TIME SERIES ANALYSIS:
Introduction:
We know that planning about future is very necessary for the
every business firm, every govt. institute, every individual and for
every country. Every family is also doing planning for his income
expenditure. As like every business is doing planning for
possibilities of its financial resources & sales and for maximization
its profit.
Definition: “A time series is a set of observation taken at
specified times, usually at equal intervals”.
“A time series may be defined as a collection of reading belonging to
different time periods of some economic or composite variables”.
By –Ya-Lun-Chau

 Time series establish relation between “cause” & “Effects”.

 One variable is “Time” which is independent variable & and the
second is “Data” which is the dependent variable.
We explain it from the following example:

Day No. of Packets of milk sold Year Population (in Million)

Monday 90 1921 251

Tuesday 88 1931 279

Wednesday 85 1941 319

Thursday 75 1951 361

Friday 72 1961 439

Saturday 90 1971 548

Sunday 102 1981 685

• From example 1 it is clear that the sale of milk packets is decrease

from Monday to Friday then again its start to increase.
• Same thing in example 2 the population is continuously increase.
Importance of Time Series Analysis:-
As the basis of Time series Analysis businessman can
predict about the changes in economy. There are
following points which clear about the its importance:

1. Profit of experience.
2. Safety from future
3. Utility Studies
4. Sales Forecasting 5. Budgetary Analysis
6. Stock Market Analysis 7. Yield Projections
8. Process and Quality Control
9. Inventory Studies
10. Economic Forecasting
11. Risk Analysis & Evaluation of changes.
12. Census Analysis
Components of Time Series:-
The change which are being in time series, They are
effected by Economic, Social, Natural, Industrial &
Political Reasons. These reasons are called components
of Time Series.

 Secular trend :-
 Seasonal variation :-
 Cyclical variation :-
 Irregular variation :-
Secular trend:
The increase or decrease in the movements of
a time series is called Secular trend.
A time series data may show upward trend or downward trend
for a period of years and this may be due to factors like:
 increase in population,
change in technological progress ,
large scale shift in consumers demands,

For example,
• population increases over a period of time,price increases over
a period of years,production of goods on the capital market of
the country increases over a period of years.These are the
examples of upward trend.
• The sales of a commodity may decrease over a period of time
because of better products coming to the market.This is an
example of declining trend or downward.
• Seasonal variation:
• Seasonal variation are short-term fluctuation in a
time series which occur periodically in a year.
This continues to repeat year after year.
– The major factors that are weather conditions and
customs of people.
– More woolen clothes are sold in winter than in the
season of summer .
– each year more ice creams are sold in summer and
very little in Winter season.
– The sales in the departmental stores are more during
festive seasons that in the normal days.
Cyclical Variations:
Cyclical variations are recurrent upward or downward
movements in a time series but the period of cycle is
greater than a year. Also these variations are not regular
as seasonal variation.

A business cycle showing these oscillatory movements has to

pass through four phases-prosperity, recession, depression
and recovery. In a business, these four phases are
completed by passing one to another in this order.
•
• Irregular variation:
Irregular variations are fluctuations in time series that are
short in duration, erratic in nature and follow no
regularity in the occurrence pattern. These variations
are also referred to as residual variations since by
definition they represent what is left out in a time series
after trend ,cyclical and seasonal variations. Irregular
fluctuations results due to the occurrence of unforeseen
events like :
• Floods,
• Earthquakes,
• Wars,
• Famines
Time Series Model
• Addition Model:
Y=T+S+C+I
Where:- Y = Original Data
T = Trend Value
S = Seasonal Fluctuation
C = Cyclical Fluctuation

• Multiplication Model: I=
Y=TxSxCxI I = Irregular
or
Fluctuation
Y = TSCI
 Measurement of Secular trend:-

• The following methods are used for calculation

of trend:

 Free Hand Curve Method:

 Semi – Average Method:
 Moving Average Method:
 Least Square Method:
Free hand Curve Method:-
• In this method the data is denoted on graph paper. We
take “Time” on ‘x’ axis and “Data” on the ‘y’ axis. On
graph there will be a point for every point of time. We
make a smooth hand curve with the help of this plotted
points.
Example:
Draw a free hand curve on the basis of the
following data:
Years 1989 1990 1991 1992 1993 1994 1995 1996

Profit 148 149 149.5 149 150.5 152.2 153.7 153

(in
‘000)
155

154

153

152 Trend Line

151

150
Profit ('000)
149

148 Actual Data

147

146

145
1989 1990 1991 1992 1993 1994 1995 1996
Semi – Average Method:-
• In this method the given data are divided in two parts,
preferable with the equal number of years.

• For example, if we are given data from 1991 to 2008,

i.e., over a period of 18 years, the two equal parts will be
first nine years, i.e.,1991 to 1999 and from 2000 to
2008. In case of odd number of years like, 9, 13, 17, etc..,
two equal parts can be made simply by ignoring the
middle year. For example, if data are given for 19 years
from 1990 to 2007 the two equal parts would be from
1990 to 1998 and from 2000 to 2008 - the middle year
1999 will be ignored.
• Example:
Find the trend line from the
following data by Semi – Average Method:-
Year 1989 1990 1991 1992 1993 1994 1995 1996

Production 150 152 153 151 154 153 156 158

(M.Ton.)

There are total 8 trends. Now we distributed it in equal part.

Now we calculated Average mean for every part.

First Part = 150 + 152 + 153 + 151 = 151.50

4

Second Part = 154 + 153 + 156 + 158 = 155.25

4
Year Production Arithmetic Mean
(1) (2) (3)

1989 150

1990 152
151.50
1991 153

1992 151

1993 154

1994 153
155.25
1995 156

1996 158
 Production
160

158

156

154 155.25

Production
152

150 151.50

148

146
1989 1990 1991 1992 1993 1994 1995 1996
Moving Average Method:-
• It is one of the most popular method for calculating Long Term
Trend. This method is also used for ‘Seasonal fluctuation’, ‘cyclical
fluctuation’ & ‘irregular fluctuation’. In this method we calculate
the ‘Moving Average for certain years.
• For example: If we calculating ‘Three year’s Moving Average’ then
according to this method:
=(1)+(2)+(3) , (2)+(3)+(4) , (3)+(4)+(5), ……………..
3 3 3
Where (1),(2),(3),………. are the various years of time series.
Example: Find out the five year’s moving Average:
Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Price 20 25 33 33 27 35 40 43 35 32 37 48 50 37 45
Year Price of Five year’s moving Five year’s moving
sugar (Rs.) Total Average (Col 3/5)
(1) (2) (3) (4)
1982 20 - -
1983 25 - -
1984 33 135 27
1985 30 150 30
1986 27 165 33
1987 35 175 35
1988 40 180 36
1989 43 185 27
1990 35 187 37.4
1991 32 195 39
1992 37 202 40.4
1993 48 204 40.8
1994 50 217 43.4
1995 37 - -
1996 45 - -
Least Square Method:-

• This method is most widely in practice. When this method is

applied, a trend line is fitted to data in such a manner that
the following two conditions are satisfied:-
 The sum of deviations of the actual values of y and computed
values of y is zero.
Y  Y   0
c

 i.e., the sum of the squares of the deviation of the actual and
computed values is least from this line. That is why method is
called the method of least squares. The line obtained by this
method is known as the line of `best fit`.

 Y  Y  is least
c
2
The Method of least square can be used either to fit a straight line
trend or a parabolic trend.
The straight line trend is represented by the equation:-

= Yc = a + bx

Where, Y = Trend value to be computed

X = Unit of time (Independent Variable)
a = Constant to be Calculated
b = Constant to be calculated
Example:-
Draw a straight line trend and estimate trend value for 1996:
Year 1991 1992 1993 1994 1995

Production 8 9 8 9 16
 Solution:-
Deviation From Trend
Year 1990 Y XY X2 Yc = a + bx
(1) X (3) (4) (5) (6)
(2)

1991 1 8 8 1 5.2 + 1.6(1) = 6.8

1992 2 9 18 4 5.2 + 1.6(2) = 8.4

1993 3 8 24 9 5.2 + 1.6(3) = 10.0

1994 4 9 36 16 5.2 + 1.6(4) = 11.6

1995 5 16 80 25 5.2 + 1.6(5) = 13.2

N= 5 X Y  XY X
2

’ = 15 =50 = 166 = 55
Now we calculate the value of two constant ‘a’ and ‘b’ with the help
of two equation:-
  Y  Na  b X
 XY  a X  b X 2

Now we put the value of     ,&N :-

X , Y , XY , X 2

50 = 5a + 15(b) ……………. (i)

166 = 15a + 55(b) ……………… (ii)

Or 5a + 15b = 50 ……………… (iii)

15a + 55b = 166 …………………. (iv)

Equation (iii) Multiply by 3 and subtracted by (iv)

-10b = -16
b = 1.6
Now we put the value of “b” in the equation (iii)
= 5a + 15(1.6) = 50
5a = 26
26
a = 5 = 5.2
As according the value of ‘a’ and ‘b’ the trend line:-
Yc = a + bx
Y= 5.2 + 1.6X

Now we calculate the trend line for 1996:-

Y1996 = 5.2 + 1.6 (6) = 14.8
m