Do you want to know what is forecasting in business? If yes, you are in the right place.
Planning is a very vital element when it comes to business growth and success.
There are so many ways to make plans for a business, and one of these is forecasting.
Forecasting is an effective planning tool that every business owner should know how to implement.
While times are quite uncertain, this does not mean you should give up planning for your business.
It may seem futile to spend so much time planning only for one situation to come and put all that to waste.
But you should not see it this way.
Planning is not irrelevant and futile.
On the contrary, it is even more important than ever.
This is why you need to know more about forecasting.
Thankfully, this article will help you with all that.
Let’s dive into it.
Meaning of Forecasting in Business – What is Forecasting in Business
Forecasting is a process of analyzing current and past business data and market trends and using the result of the analyses to predict the future of the business.
Let’s break that definition into simpler terms.
When a business forecasts, they simply predict the future by considering certain factors that have happened or are currently happening.
It helps an organization brace up for the uncertainties that come with the future.
This way, the organization can plan for a future event and won’t be surprised when it eventually happens.
Forecasting predicts a business’s sales growth, revenue generation, GDP growth, and so on.
Forecasting is very important for managerial functions within an organization.
It is what makes it easier for managers to make informed predictions for capital allocation.
They also use it to determine the best time to expand, make acquisitions, invest, and divest.
This is why forecasting is both a decision-making and a planning tool.
Forecasting Technique – What is Forecasting in Business
There are two major forecasting techniques.
They are quantitative and qualitative forecasting.
Both techniques are cool.
However, a major determiner of which one to use for your business would be how long the company has been operating.
Let’s take a closer look at these forecasting techniques to help you understand them better and to ensure you know which will be a better option depending on the state of your business.
Quantitative Forecasting Technique
This method makes predictions based on past performance.
It can be used in situations where measurable data can be used for the forecast.
With this method, you can measure future metrics against past data.
This way, you can determine whether a business is slowing down or growing.
The quantitative technique is commonly used for carrying out short-term forecasts.
Below are some common methods under the quantitative forecasting technique.
A mathematical model is used for this approach to predict major financial shifts and the impact they may have on the business.
This method can be used to forecast financial developments in the future by comparing sales data and several economic variables.
This approach involves studying the link between certain economic indicators and then using this to predict economic events.
These economic indicators include unemployment, productivity, gross domestic product, etc.
The indicator method is less mathematical than the economic model discussed above.
In this method, the forecast person studies the historical data and then takes raw points from it.
The forecast person will then use these points to predict how trends, cycles, and seasonality will repeat in the future.
This type of forecasting presents data using line charts.
And it is used in several business fields, such as operations, sales, finance, etc.
Qualitative Forecasting Technique
On the other hand, the qualitative forecasting technique is not usually measured against previous data.
Rather, the whole forecasting process will be based on the judgment of whoever is doing the forecast.
This is why this technique requires a professional with adequate experience so they can make proper forecasting.
If your business is quite new and does not have previous sales or expenses data, then you would have to opt for this option.
This technique is also ideal for long-term forecasting.
So, even if you have the necessary data to carry out quantitative forecasting but want to forecast deep into the future, you should use the qualitative technique.
Now that you know qualitative forecasting, let’s consider some common methods under this technique.
This forecasting method involves gathering a panel of professionals and getting their opinions on certain business topics.
The person conducting the forecast would typically collect these opinions anonymously and individually, which will be used to make predictions.
Overall, the Delphi s forecasting success lies in its individualistic nature.
This is because the professionals will give their opinions individually, and there won’t be group thinking that may make the survey less authentic.
Consumer survey allows the forecaster to get market insights that will be used to make market predictions.
There are many ways to conduct consumer surveys; they could be done via questionnaires, phone calls, interviews, etc.
When the necessary information is gathered, the forecaster can conduct statistical analysis to help them understand consumer behaviour.
Sales Force Polling
This method of forecasting relies on insight gathered from salespeople.
The idea behind this method is that salespeople have a closer relationship with consumers.
Therefore, they have an accurate idea of what customers want.
So, polling salespeople to get market insights is a great idea, and the poll results are then used to create a forecast.
Note: In a nutshell, the major difference between the quantitative and qualitative techniques is that the former is measured against existing data while the latter isn’t.
Also, there are certain situations where one is a better option than the other.
Therefore, before deciding on the kind of technique to use, consider certain factors to ensure you pick the right option for the given situation.
Forecasting Vs Budgeting – What is Forecasting in Business
Another topic that may come up when discussing forecasting is budgeting.
However, the major similarity between these concepts is that they are both business planning tools.
But that is where the similarity ends.
These two concepts are entirely different and should not be confused with each other.
So, how is forecasting different from budgeting? You may be wondering.
Well, budgeting typically focuses on allocating finances to various aspects of a business for a given period.
It usually covers all aspects of the business and isn’t limited to just one department or sector.
Every department within the organization will give its own input to get a detailed and holistic budget.
Therefore, budgeting takes a long time to complete.
Forecasting, on the flip side, can be limited to just one area of the business.
For instance, you can forecast the sales sector of the business to see how much sales the company is projected to have.
Also, forecasting does not focus solely on finances, unlike budgeting.
Rather, it can predict several aspects of a business, while budgeting guide a business’ financial activities.
Another difference between these concepts is the period they cover.
Budgets are usually made yearly, whereas forecasts are updated quarterly or monthly.
Finally, organizations use forecasts to make and adjust their budget.
For example, if the forecast predicts that it would be a great time to expand the business, this prediction would then be used to allocate more funds to the department that would facilitate the expansion.
Therefore, forecasts inform budgets.
Types of Forecasting – What is Forecasting in Business
Aside from the techniques of forecasting earlier mentioned, there are also types of forecasting.
Forecasting types are typically based on the items or metrics measured when conducting a forecast.
Let’s take a quick look at some common types of forecasting below.
This type of forecasting predicts the amount of money that will go out and come into the business within a given period.
If you carry out cash flow forecasting accurately, it will ensure a smooth operation of the business during the forecast duration.
This is because the plans that would be made based on the prediction will be in sync with the money available since the prediction was made accurately.
Startup Cost Forecast
This type of forecast determines the business startup costs within a given period, like 6 months or even a year.
Sales forecasting predicts the sales a business will have in the future.
It typically involves considering previous sales and then using the analyses to predict future sales.
This type of forecasting is very important because it makes it easier for a business to manage its inventory or demand properly.
You can use this type of forecast to determine demand, extension, and sales.
Forecasting demand simply involves analyzing historical data such as seasonal trends and sales.
And using the result of the analyses to determine future periods where demand would either be low or high.
This typically predicts how much expenses a business will likely incur during a period in the future.
Expenses forecasts are very important since they would prepare the business for the expenses they would likely encounter.
This will make them brace up and prepare for the impact of these expenses.
It will also reduce the chances of unexpected expenses taking away the business profits.
Why is Forecasting Important in Business – What is Forecasting in Business
At this point, you can already see that forecasting is an important planning tool for any business.
But if you still don’t see the importance of forecasting in business, then knowing the benefits your business stands to enjoy from forecasting will convince you.
That said, here are three major reasons you should conduct forecasting in your business.
Helps You Make Good Futuristic Plans
One of the major benefits of forecasting is that it helps you make plans for your business.
Uncertainties are common in the business world.
One situation can completely change the projection of a business; a good example is the global covid-19 pandemic.
It may seem like a waste of time to make plans when everything is uncertain, but the reverse is the case.
Making plans is even more critical in uncertain times because even though you do not have an accurate prediction, you would have made a plan.
And if your prediction eventually ends up being correct, you will have a plan you can fall back on.
Prevents You from Getting Surprised by Tax Bills
As long as you run a business, your business will always have to pay taxes.
Taxes are constant and should not be surprising.
Yet, several business owners often feel surprised when they get their tax bills.
This is because the bill may be much bigger than they thought it would be.
When you forecast, you won’t experience surprises like these.
Also, you will be laying out every expense your business will incur, including your tax bills.
So, you would know what you’d be paying in tax, and when you eventually get the bill, it would not be an unexpected expense.
Help You Anticipate Market Changes – What is Forecasting in Business
Market trends change from time to time.
Any business that wants to stay relevant in the market needs to know how to keep up with the trend.
When your business isn’t ready for the changes, it will have a hard time keeping up with them.
However, when you have forecasted a market change, you would have already implemented things to help you adapt to the change faster and easier.
This would give you an edge over your competitors.
Helps You Make Better Business Decisions – What is Forecasting in Business
If you do not know the current and future things happening in your company, you will be operating it blindly.
You won’t know when to expand, when a challenge is forthcoming, or even when there’s a new opportunity at your door.
This would cause you to make bad decisions and do things ignorantly.
But when you have a forecast, it will help you make better decisions for your business.
You will find it easier to streamline your operations and work to ensure increased profits.
Forecasting Features – What is Forecasting in Business
A good forecast often has certain factors that make it reliable.
So, when making a forecast, you need to ensure that it has these factors.
The following are some features of forecasting.
It is not a forecast if it doesn’t involve future happenings.
The main purpose of a forecast is to predict future occurrences.
So, when making a forecast, you should ensure it predicts the future.
This is the only way you can use the forecast to make necessary plans and decisions.
Past and Current Events
Typically, you’d create forecasts (even qualitative ones) using past and current happenings.
Forecasts could be based on data, facts, intuition, guesses, opinions, etc.
But all of these are usually based on things that have happened or are currently happening.
You can’t just make a wild guess that isn’t based on any current or past event and then use it to make a forecast.
As you already know, there are different forecasting techniques.
When making a forecast, you need to use any of these techniques and not just make the forecast anyhow you like.
To create a forecast, you need to go through the proper step-by-step process.
This will ensure that you get an accurate result at the end of the forecast.
Develop the Forecasting Basis
This is the first thing you need to do when creating a forecast.
In this step, you should form the forecast basis.
You will analyze the business, its current state, and its position in the market.
Estimate the Business’ Future Operations
At this point, you would start making estimates based on what you had analyzed in step one.
Your estimations will involve projecting the industry conditions and how the business will fare against them.
Evaluate Your Forecast
Now, you need to evaluate your forecast and ensure its accuracy.
To do this, you should study past forecasts and compare them to what happened during the prediction time.
You would then analyze the differences between the current forecast and the preceding results and see if there are deviations.
If there are, you should consider their reasons and adjust your forecast accordingly.
Lastly, you would need to review the entire process.
Go through each step and make adjustments where you need to.
Conclusion on What is Forecasting in Business
Forecasting involves predicting the future of a business by considering certain factors that have happened in the past or are currently happening.
This process is fundamental because it helps a business make grand plans for the future.
There are two major techniques for carrying out a business forecast.
The technique you choose for your business depends on how long your company has been operational and your company has historical data.
It does not matter the kind of technique you choose to use.
What matters is that you do everything correctly and follow the process accurately, as seen in this article.