Forecasting
Forecasting
Introduction
Forecasting is the establishment of future expectations by the analysis of past data, or the formation of opinions. Forecasting is an essential element of capital budgeting. Capital budgeting requires the commitment of significant funds today in the hope of long term benefits. The role of forecasting is the estimation of these benefits. 2
Routes
Top-down route Bottom-up route
Delphi method Nominal group technique Jury of executive opinion Scenario projection
Quantitative Forecasting
Quantitative: Regression with related variable Data set of Sales as related to both time and the number of households.
H TR A DT I O I L AA S C YA ER 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
H U E OD OSH L S
1 1 1 1 1 1 11 1 1 1 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
SL S AE
11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
Quantitative Forecasting
Quantitative: Sales plotted related to households.
SalesUnits Related to Number of Households
11 11 Sales Units 11 11 11 11 11 11 11 11 1 1 11 1 11 11 11 11 Sales
Number of Households
5
Quantitative Forecasting
Quantitative: Sales regressed on households.
SUMM ARY OUTPUT SALES REGRESSED AS A FUNCTION Edited output OF HOUSEHOLDS regression. from the Excel Regression Statistics M ultiple R 11 1 1 1 1 . 1111 R Square 11 1 1 1 . 1111 Adjuste d R Squa re 11 1 1 1 1 . 1 1 1 1<== "Stre ngth" of the re gre ssion Standard Error 1 11 1 1 1 1. 1 1 1 Observations 1 1
Coefficients Standard Error t Stat P-value Y Ax is Inte rce pt -1 11 1 1 1 11 1 -11 1 1 11 1 .1 1. 1 . . 1 Num be r of House holds 11 1 . 1 11 1 . 1 11 1 . 1 11 1 . 1
6
Quantitative Forecasting
Quantitative: Sales regressed on households.
Quantitative Forecasting
Quantitative: Multiple Regression Sales as a function of both time and the number of households.
H TR A DT I O I L AA S C YA ER 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
H U E OD OSH L S
1 1 1 1 1 1 11 1 1 1 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
SL S AE
11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1
Quantitative Forecasting:
Multiple Regression Line Information From the Excel spreadsheet.
S UM M ARY O UT P UT Regres s ion S tatis tic s M ultiple R 11 1 . 11 R S quare 11 1 . 11 A djus ted R S quare 11 1 < = = "S tre n g th " o f re g re ssio n . 11 . S tandard E rror 1 11 1 1. 1 1 O bs ervations 1 1
Y Ax is In te rce p t Ca le n d a r Ye a r Ho u se h o ld s
Quantitative Forecasting
Quantitative: Time Series Regression Sales plotted as a function of time.
Plot of Past Sales Units By Year
11 11 Sales Units 11 11 11 11 11 11 11 11 1 11 11 11 11 Year
11
Sales
11 11
11 11
11 11 Year
11 11
11 11
12
14
Quantitative Forecasting:
Regression: Auto Forecast by Excel.
Sales by Year, With Automatic Three Year Prediction
11 11 11 11 11 11 SALES
Sales
11 11 11 11 11 11 1 11 11 11 11 11 11 11 11 11 11
Year
15
Quantitative Forecasting:
Moving Average- Auto Plot
Sales Units Per Year With Fitted Two Year Moving Average
11 11 Sales Units 11 11 11 11 11 11 11 11 1 11 11 11 11 Years 11 11 11 11
16
Quantitative Forecasting:
Notes on Excel Auto Plot.
Excel will plot, and automatically forecast, a data series which has a functional relationship. For example, a regression trend line. The auto plot is driven through the Chart menu as Add Trendline. A particular forecast is specified via the dialog box. Future point data values cannot be read from the automated trendline. Non-functional relationships, such as a moving average, can be plotted, but cannot be automatically forecast.
17
Forecasting Routes
Top-Down
where international and national events affect the future behaviour of local variables.
18
Forecasting Routes
Bottom-Up
19
Forecasting: Summary
Sophisticated forecasting is essential for
capital budgeting decisions Quantitative forecasting uses historical data to establish relationships and trends which can be projected into the future Qualitative forecasting uses experience and judgment to establish future behaviours Forecasts can be made by either thetop down or bottom up routes.
20