Need for Business Forecasting
Business Forecasting is an estimate or prediction of future developments in business
such as sales, expenditures, and profits. Given the wide swings in economic activity
and the drastic effects these fluctuations can have on profit margins, it is not
surprising that business forecasting has emerged as one of the most important
aspects of corporate planning. Forecasting has become an invaluable tool for
businesspeople to anticipate economic trends and prepare themselves either to
benefit from or to counteract them. If, for instance, businesspeople envision an
economic downturn, they can cut back on their inventories, production quotas, and
hiring. If, on the contrary, an economic boom seems probable, those same
businesspeople can take necessary measures to attain the maximum benefit from it.
Good business forecasts can help business owners and managers adapt to a
changing economy.
Some of the important needs of business forecasting are listed below:
1. Helps in Production Planning
The rate of producing the products must be matched with the demand which may be
fluctuating over the time period in the future. Since its time consuming to change the
rate of output of the production processes, so production manager needs medium
range demand forecasts to enable them to arrange for the production capacities to
meet the monthly demands which are varying.
2. Helps in Financial Planning
Sales forecasts are driving force in budgeting. Sales forecasts provide the timing of
cash inflows and also provide a basis for budging the requirements of cash outflows
for purchasing materials, payments to employees and to meet other expenses of power
and utilize etc. Hence forecasting helps finance manager to prepare budgets taking
into consideration the cash inflow and cash out flows.
3. Helps in Economic Planning
Forecasting helps in the study of macroeconomic variables like population, total
income, employment, savings, investment, general price-level, public revenue, public
expenditure, balance of trade, balance of payments and a host of other macro aspects
at national or regional levels. The forecasts of these variables are generally for a long
period of time ranging between one year to ten or twenty years ahead. Much would
depend on the perspective of planning, longer the perspective longer would be period
of forecasting. Such forecasts are often called as projections. These are helpful not
only for planning and public policy making, they also include likely economic
environment and aid formulation of business policies as well.
4. Helps in Workforce Scheduling
The forecast of monthly demand may further be broken down to weekly demands and
the workforce may have to be adjusted to meet these weekly demands. Hence,
forecasts are needed to enable managers to get tuned with the workforce changes to
meet the weekly production demands.
5. Helps in Decisions Making
The goal of the forecaster is to provide information for decision making. The purpose
is to reduce the range of uncertainty about the future. Businessmen make forecasts for
the purpose of making profits. In business forecast has to be done at every stage. A
business man may dislike statistics or statistical theories of forecasting, but he can not
do without making forecasts. Business plans of production, sales and investment
requires predictions regarding demand for the product, price at which the product can
be soled and the availability of inputs. The forecast about demand is the most crucial.
Operating budgets of various departments of a company have to be based upon the
expected sales. Efficient production schedules, minimization of operating cost and
investment in fixed assets is when accurate forecasts recording sales and availability
of inputs are available.
6. Helps in Controlling Business Cycles
It is commonly believed that business cycles are always very harmful in their effects.
Abrupt rise and fall in the price level injurious not only to businessmen, but to all
types of persons, industries, trade, agriculture. All suffer from the painful effects of
depression. Trade cycle increase the risk of business; create unemployment; induce
speculation and discourage capital formation. Their effects are not confined to one
country only. Business forecasting reduces the risk associated with business cycles.
Prior knowledge of a phase of a trade cycle with its intensity and expected period of
happening may help businessmen, industrialist, and economists to plan accordingly to
reduce the harmful effects of trade cycle’s statistics is thus needed for the purpose of
controlling the business-cycles.
Credit: Managerial Economics-MGU