Forecasting

Meaning
• Forecasting is the process of predicting future
conditions that will influence and guide the
activities, behaviour and performance of the
organisation.

• Business forecasting refers to analysis of past

and current events so as to obtain clues about
future trends in the business environment.
 Definition

• Glueck:
Forecasting is the formal process of predicting future
events that will significantly affect the functioning of
the enterprise.

• Louis Allen:
Forecasting is a systematic attempt to probe the future
by inference from known facts. The purpose is to
provide management with information on which it
can base planning decisions.
 Features
1. Forecasting defines the probability of happening of future
events.
2. Forecasting is done by analysing the past and present events
relevant to the functioning of the enterprise.
3. Forecasting is a specialised activity – use of several
techniques.
4. Forecasts are made on the basis of internal and external data
collected through informal monitoring and formal scanning
of the environment.
5. The quality of forecasts depends on the reliability of
information.
6. Forecasts may be made for long-term or short-term.
7. Forecasts can be of several types – economic forecasts, sales
forecasts and technological forecasts.
 Planning and forecasting
• Forecasting indicates the probable course of future events,
plans decide how to prepare for these events.
• The information generated through forecasting serves as an
input to planning.

Planning
Planning is comprehensive – elements
and sub-processes
Planning – top level management
Planning involves decision making.
Planning indicates what the future is
desired and how to make it a reality.
Forecasting
Forecasting involves estimates of future
events and provides parameters to
planning.
Forecasting – middle or lower level
management.
Forecasting helps decision making by
providing clues about what is likely to
happen in the future.
Forecasting involves what the future is
likely to be and is likely to behave.
Importance of
forecasting (benefits) Limitations of forecasting

1. Key to planning 1. Based on assumptions

2. Means of coordination 2. Not absolute truth
3. Basis for control 3. Time-consuming and
4. Executive development expensive
5. Facing environmental
challenges
 Steps in forecasting
Developing the ground work
(Thorough investigation and analysis of
various factors)

Estimating future trends

(intelligent guesses)

Comparing actual and estimated results

(to indentify causes for deviations and to
take corrective action)

Refining the forecast

(by improvements in data and techniques
over a period of time)
 Techniques of Forecasting
1. Time series analysis: A historical series of data is
decomposed into various components, viz., trend, seasonal
variations, cyclical variations and random variations. After
the original data are adjusted for seasonal and cyclical
variations, a trend line can be fitted by using the method of
least squares.

2. Extrapolation: On the basis of past behaviour of data, a

trend curve is established.

3. Regression analysis: It is used to estimate the changes in

one variable as a result of specified changes in other
variables. Eg, correlation between advertising expenditure
and sales volume.
4. Input-output analysis: Input requirement or output is estimated
on the basis of known relationship between input and output. Eg,
total quantity of petrol required in the country can be estimated
on the basis of its usage rates in various sectors. Input-output
analysis yields sector-wise forecasts.

5. Econometric models: Mathematical models are used to express

in quantitative terms the inter-relationship among different
variables.

6. Historical analogy: Forecast is based on some analogous

conditions elsewhere in the past.

7. Business barometers: Index numbers used to predict the

directions in which the economy is moving. Eg, GDP, consumer
price index, IIP, BSE Sensex, etc.
8. Panel consensus method: Panel of experts – opinions are
combined and averaged.

9. Delphi technique: The minds of experts in the concerned

area are probed systematically without and face-to-face
contact.

10. Morphological analysis: Used mainly to forecast

technological changes. It consists of identifying the relevant
dimensions of the object, listing all varieties and
combinations of these dimensions and finding practical
applications for them.
 Choice of a forecasting method: Factors

• Time period to be covered

• The cost of the forecasts
• Time available for forecasting
• Content of the forecast
• Desired degree of accuracy
• The relevance and availability of historical data.