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Welcome to this Session on Business and Economic Forecasting:Objectives and Techniques

Md. Alamgir BIBM.

Business Forecasting
The growing competition, rapidity of change in business activities and the trend towards automation demand that decisions in business are not based purely on guesses rather on a careful analysis of data concerning the future course of events. More time, effort and attention should be given to the future than to the past, and the question 'what is likely to happen ?' should take precedence over 'what has happened ?' though no attempt to answer the first can be made without the facts and figures being available to answer the second

Business Forecasting

When estimates of future conditions are made on a systematic basis, the process is referred to as "forecasting" and the figure or statement obtained is known as a "forecast". Forecasting is a service whose purpose is to offer the best available basis for management expectations of the future and to help management understand the implications for the firm's future of the alternative courses of action to them at present.

Business Forecasting

In a world where the future is not known with certainty, virtually every business and economic decision rests upon a forecast of future conditions. In fact when a person assumes the responsibility of running a business he automatically takes the responsibility for attempting to forecast the future and to a very large extent his success or failure would depend upon the ability to forecast successfully the future course of events.

Business Forecasting
Forecasting aims at reducing the area of uncertainty that surrounds management decision-making with respect to costs, profit, sales, production, pricing, capital investment, and so forth. If the future were known with certainty, forecasting would be unnecessary. Decisions could be made and plans formulated on a once-for-all basis, without the need for subsequent revision. But uncertainty does exist, future outcomes are rarely assured and, therefore, organized system of forecasting is necessary.

Business Forecasting
Forecasting is concerned with two main tasks: First, the determination of the best basis available for the formation of Intelligent managerial expectations; and Second, the handling of uncertainty about the future, so that implication of decisions become explicit. Forecasting activity can be viewed as part of the management information system. It also impinges on the control system.

Business Forecasting Forecasts are commonly applied to capital investment decisions, strategic planning, product and market planning, production planning and stock control, budgetary control and financial planning and competitive position planning. in fact, managers are forecasters and they are forecasting for much of their time. They plan production in expectation of certain levels of sales. They set prices in expectation of certain levels of wages, raw material costs, financial constraints and sales. They build warehouses in expectation of certain levels of stocks and sales. They recruit labour, buy materials, arrange finance, or plan factories in expectation of certain levels of sales and other activity.

Objectives of Forecasting
The following are the main objectives of forecasting: (1) The creation of plans of action. It is impossible to evolve a, worthwhile system of business control without one acceptable system of forecasting. (2) The second general use of forecasting is to be found in monitoring the continuing progress of plans based on forecasts. Forecasts serve the function of lighthouses to shipmasters at night (3) The forecast provides a warning system of the critical factors to be monitored regularly because they might drastically affect the performance of the plan.

Steps in Forecasting
Broadly speaking, the business forecasting consists of the following steps:

(1) Understanding why changes in the past have occurred. (2) Determining which phases of business activity must be measured. (3) Selecting and compiling data to be used as measuring devices. (4) Analysis of data.

Requirements of a Good Forecasting System A forecasting system to be instrumental in contributing to better management decision-making should satisfy the following conditions:
(1) It must involve the managers whose decisions are affected. (2) The forecasts must not claim too much validity or authority. (3) Implications of the various-probable errors in the predictions for the organizations need to be thoroughly worked out so that management can evaluate the consequences of the probable range of likely outcomes. (4) Management must at least know how badly things could go Wrong if all the guesses turned out wrong.

Techniques of Forecasting There is nothing new about business forecasting. For centuries businessmen have tried to adjust themseves in such a manner as to make the best out of the future conditions. The rule-of-thumb method has been widely practised in business. It consists of deciding about the future in terms of past experience familiarity with the problem at hand. Even today this method is very widely used in business. But, it can lead to absurd conclusions if employed by the inexperienced.

Techniques of Forecasting
In recent years the techniques of forecasting have improved to a marked degree and are applicable to almost every sphere of business activity. Attempts are being made to make forecasting as scientific as possible. To handle increasing variety of managerial forecasting problems, many forecasting techniques have been developed in recent years. Each has its special use, and care must be taken to select the correct technique for particular application.

Techniques of Forecasting
Before applying a method of forecasting, the following questions should be answered: (1) What is the purpose of the forecast-how is it to be used ? (2) What are the dynamics and components of the system for which the forecast will be made? (3) How important is the past in estimating the future?

Techniques of Forecasting The following are some of the important techniques of forecasting: 1. Historical Analogy Method 2. Field Surveys and Opinion Poll 3. Business Barometers 4. Extrapolation 5. Regression Analysis, 6. Econometric Models 7. Lead-Lag Analysis 8. Exponential Smoothing 9. Input-output or end-use Analysis 10. Time Series Analysis

Organization and its goals

Basically, an organization is a group of people intentionally organized to achieve an overall, common goal or set of goals. Business organizations can range in size from two people to tens of thousands. There are several important aspects to consider about the goal of the business organization.

Organization and its goals

Organization of business in modern times can assume the following forms: sole proprietorship, individual entrepreneur or one-man business, partnership, joint-stock companies, cooperative enterprises and State enterprises.

Organization and its goals INDIVIDUAL ENTREPRENEUR The organiser of the 'one-man concern invests his own capital and may also borrow some. He rents a shop and hires the service of an assistant, if necessary. He himself makes purchases and personally attends to the sales. He is his own manager. He initiates, organises, directs all economic activity and takes the entire risks. Thus, the sole proprietor combines in his person the functions of capital, enterprise and even labour in many cases. Here the usual goal is to maximize the profit.

Organization and its goals

PARTNERSHIP Limitations of the one-man business give rise to another form of business organisation, called partnership. Two, three or more people combine, contribute capital, and agree to share profits and bear losses in agreed proportions. Here also the usual goal is to maximize the profit.

Organization and its goals

JOINT-STOCK COMPANY The joint-stock company is undoubtedly the most important type of business organisation today. It seeks to remedy the disabilities and the handicaps of the partnership arising out of small financial resources and limited business talent. Here also the usual goal is to maximize the profit.

Organization and its goals JOINT-STOCK COMPANY The company business is generally a large-scale business. Therefore, it enjoys all the economies of large-scale production, internal and external, e.g., economies arising from the use of specialized labor and machinery, economy of space, of buying and selling, publicity, research or experiments, etc. The management is democratic, efficient and economical. The directors are elected by the shareholders. They are supposed to be persons with wider vision, outstanding administrative ability and business acumen. Their expert advice and guidance are available to the company at a very moderate cost

Organization and its goals

CO-OPERATIVE ENTERPRISE Cooperatives are voluntary organisations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political or religious discrimination.

Organization and its goals CO-OPERATIVE ENTERPRISE Producers' Co-operation Consumers' Co-operation: There is another type of cooperation which has a long record of success. It is Consumers' Cooperation. The arrangement is that the consumers of a locality contribute capital in small shares and start 1 store of their own. The cooperative store buys goods from wholesalers like other dealers, and sells these goods to their members at the ordinary market rates. Profits are distributed among the members in proportion to their purchases or, what is more common, in proportion to the share capital. Generally, share capital is equally contributed and profits are, therefore, also equally divided among members.

Organization and its goals

STATE ENTERPRISE In every country, there are many public undertakings run by Governments or local bodies. Postal and telegraph arrangements are generally under the Government; and public utility services like water supply, gas, electric supply,or tram or bus services are managed by municipal corporations.

Organization and its goals STATE ENTERPRISE


The organisation of State enterprise is on the same lines as private enterprise with the usual structure of general manager, foremen, works manager, accountants, treasurer, departmental heads, and so on. The work is done generally in the same manner as in a joint-stock company. But there is a fundamental difference. All the employees are government servants with fixed tenure and prospect of getting a pension on retirement. The capital is provided from the State coffers, which comes ultimately from the taxpayers. Profit is secondary in government-owned corporations. Their main objective is to ensure that a particular service is available to citizens.The profits, if any, too, go to the State.

Organization and its goals Goal of Public Countries Enterprise in Under-developed

In under-developed countries, public enterprises are badly needed to initiate and accelerate the developmental process. They can promote social and economic development in the following ways. (i) By Creating Social and Economic Entities. State can provide educational facilities and technical training, medical aid and public health measures and develop irrigation and means of transportall which is indispensable for economic growth. (ii) By Building Basic Heavy Industries. It isbeyond private enterprise to develop basic heavy industries like iron and steel, heavy electrical and heavy engineering industries. But these are essential for providing a base for industrial development.

Organization and its goals Goal of Public Countries Enterprise in Under-developed

(iii) By Optimum Allocation of Resources. Private enterprise is notorious for misallocation of the country's resources lured by profit motive. Public enterprise, which is guided by social gain rather than private profit, is needed, to correct this tendency and help in bringing about an optimum allocation of resources. (iv) Ensuring Balanced Regional Growth. State, as a guardian of people's welfare, takes special pains to develop backward regions. For this purpose, industrial units are deliberately located in backward areas. In this way, regional balanced development is brought about.

Organization and its goals Goal of Public Countries Enterprise in Under-developed

(v) Utilising Surplus Labour for Capital Formation. The public enterprises favourably located can drain out from the rural areas surplus labour in the form of disguised unemployment and use it more productively. This will promote economic development. (vi) Creating Investible Surplus. The profits of public enterprises are a good source of finance for economic development. (vii) Planning Made Effective. If economic plan, ning relied on private enterprise, it would be very ineffective. Hence public enterprise is needed to make it effective.