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2. Forecasting

Forecasting is the process of estimating future events based on past and present behavior, essential for planning and decision-making in organizations. It has characteristics such as relating to future events, defining probabilities, and requiring analysis of relevant factors, while also having limitations like reliance on assumptions and costs. Effective forecasting involves data collection, critical analysis, continuous monitoring, and the use of various techniques such as historical analogy, surveys, and econometric models.

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4 views

2. Forecasting

Forecasting is the process of estimating future events based on past and present behavior, essential for planning and decision-making in organizations. It has characteristics such as relating to future events, defining probabilities, and requiring analysis of relevant factors, while also having limitations like reliance on assumptions and costs. Effective forecasting involves data collection, critical analysis, continuous monitoring, and the use of various techniques such as historical analogy, surveys, and econometric models.

Uploaded by

vertexduo18
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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2.

Forecasting
Forecasting
• Definition: “Forecasting is the process of estimating the relevant events of the future, based on the analysis of
their past and present behaviour”

• Characteristics of Forecasting
• Forecasting relates to future events. This is needed for planning process because it devises future course of
action.

• Forecasting defines the probability of happening of future events. Therefore, happening of future events can
be precise only to a certain extent.

• Forecasting is made by analysing the past and present relevant events, that is taking those factors which are
relevant for the functioning of an organization.

• The analysis of various factors may require the use of various statistical tools and techniques. However
personal observations can also help in the process.
1
Importance of Forecasting
1. Promotion of Organisation: Successful Promoters and entrepreneurs should be able to forecast what will
happen. Forecasts made on the basis of facts and past experiences are an advantage for the company.

2. Key to Planning: Forecasting generates the planning process. It provides the knowledge of planning
premises within which managers can analyse their strengths and weaknesses and can take appropriate
actions in advance before actually they are put out of the market.

3. Coordination and Control: Forecasting can provide relevant information for exercising control. The managers
can know their weaknesses and they can take suitable action to overcome these.

4. Success in Organization: Although forecasting does not check the future happenings but it provides clues
about those and indicate when the alternative action should be taken.
Limitations of Forecasting
1. Based on Assumptions

2. Not the Absolute Truth

3. Time and Cost Factor


Effective Forecasting
• All possible relevant facts should be collected taking into account the cost involved and the benefits to be
accrued.

• Critical analysis should be done of all relevant factors which have high impact on the operations of the
organisation.

• There should be continuous process of monitoring variables which need forecast.

• Various assumptions in forecasting, particularly where qualitative criteria are applied should be based on
certain facts and not just hunches.

• People involved in forecasting must have thorough understanding of various techniques of forecasting and
situations in which they could be applied.
• Forecasters should be free from biases. They should emphasize facts and figures and not what they personally
feel.

• There must be genuine support of top management to forecasting which not only facilitates forecasting
process but also makes the way for using forecast in planning process.
Steps in Forecasting
1. Developing Groundwork for Forecasting: Generally involves collection of data and information and
reviewing past data and trends.

2. Estimating Future Business: Involves projections and estimates.

3. Comparing Actual and Projected Results

4. Refining the Forecasting Process


Techniques of Forecasting
• Historical Analogy (Using historical or past data )

• Survey
• (field survey, Online survey etc)
• (Collects both quantitative as well as qualitative data)

• Opinion Poll

• Business Barometers (measure the state of economy with the use of index numbers to predict trends,
seasonal fluctuations, and cyclical fluctuations)

• Time Series Analysis (predict trends, seasonal fluctuations, and cyclical fluctuations)

• Extrapolation( it is also based on time series but it relies on the behaviours of a series in the past and projects
the same trend in the future)
• Regression Analysis
• ( Y = a+bx)
• ( It is used to estimate changes in one variable as a result of specified changes in other variable or variables)
• (Dependent and Independent variables)

• Input-Output Analysis: Forecast of output is based on given input if relationship between input and output is
known. Example: Coal requirement of the country can be predicted on the basis of its usage rate in various
sectors.

• Econometric Models (Mathematical models are used to express relationship among variables)
Scenarios
Scenario technique is used to explore the likelihood of possible future developments and changes and to
identify the interactions of uncertain future trends and events.

1. Preparation of Background (Assessing overall environmental factors relevant for the company or business)

2. Selection of Critical Indicators (Identifying future potential events that could impact business)

3. Establishing past behaviour of indicators

4. Verification of Potential Future Events

5. Forecasting the Indicators ( Analysis of the impact of various indicators collected from the above steps)

6. Writing of Scenarios

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