Business Forecasting: Meaning, Steps and Sources

After reading this article you will learn about Business Forecasting:- 1. Meaning and Definition 2. Steps of Forecasting 3. Sources of Data Used 4. Limitations.

Meaning and Definition:

Business forecasting is an act of predicting the future economic conditions on the basis of past and present information. It refers to the technique of taking a prospective view of things likely to shape the turn of things in foreseeable future. As future is always uncertain, there is a need of organised system of forecasting in a business.

Thus, scientific business forecasting involves:

(i) Analysis of the past economic conditions and

(ii) Analysis of the present economic conditions; so as to predict the future course of events accurately.

In this regard, business forecasting refers to the analysis of the past and present economic conditions with the object of drawing inferences about the future business conditions. In the words of 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.

Leo Barnes observes, “Business Forecasting is the calculation of reasonable probabilities about the future, based on the analysis of all the latest relevant information by tested and logically sound statistical econometric techniques, as interpreted, modified and applied in terms of an executive’s personal judgment and social knowledge of his own business and his own industry or trade”.

In the words of C.E. Sulton, “Business Forecasting is the calculation of probable events, to provide against the future. It therefore, involves a ‘look ahead’ in business and an idea of predetermination of events and their financial implications as in the case of budgeting.”

According to John G. Glover, “Business Forecasting is the research procedure to discover those economic, social and financial influences governing business activity, so as to predict or estimate current and future trends or forces which may have a bearing on company policies or future financial, production and marketing operations.”

The essence of all the above definitions is that business forecasting is a technique to analyse the economic, social and financial forces affecting the business with an object of predicting future events on the basis of past and present information.

Steps of Forecasting:

The process of forecasting consists of the following steps, also described as elements of forecasting:

1. Developing the Basis:

The first step involved in forecasting is developing the basis of systematic investigation of economic situation, position of industry and products. The future estimates of sales and general business operations have to be based on the results of such investigation. The general economic forecast marks as the primary step in the forecasting process.

2. Estimating Future Business Operations:

The second step involves the estimation of conditions and course of future events within the industry. On the basis of information/data collected through investigation, future business operations are estimated. The quantitative estimates for future scale of operations are made on the basis of certain assumptions.

3. Regulating Forecasts:

The forecasts are compared with actual results so as to determine any deviations. The reasons for his variations are ascertained so that corrective action is taken in future.

4. Reviewing the Forecasting Process:

Once the deviations in forecasts and actual performance are found then improvements can be made in the process of forecasting. The refining of forecasting process will improve forecasts in future.

Sources of Data Used In Business Forecasting:

Collection of data is a first step in any statistical investigation. It is the basis for any analysis and interpretations. Before collection of data, many questions shall occupy the mind of the manager. The manager must be able to answer these questions before task of collection is started.

These questions are:

Why to collect data?

What kind of data to be collected?

When it is to be collected?

Where from it should be collected?

Who will collect it?

How it shall be collected?

The answer to these questions is nothing but planning the collection of data. Planning for data collection refers to thinking or preparing before doing the actual task of data collection. The purpose or object of data collection, the scope of the data, the unit of data collection, the technique and sources of data are the important consideration in planning the data collection.

Data may be collected from primary or secondary sources depending upon the time, resources, and purpose of the investigation.

(i) Primary Sources:

It is a first-hand data collected personally by the investigator. It is costly and time consuming. Primary data is collected if secondary data is not available. It is collected by personal interviews, questionnaires or observations.

(ii) Secondary Sources:

These sources of data refer to already published data or data collected by other agencies. It is a secondhand data. Here task is more of a compilation of data.

The sources of secondary data are:

(a) Official reports of the government.

(b) Publications of Reserve Bank of India, Financial institutions etc.

(c) Annual reports of companies.

(d) Journals, Newspapers, Magazines etc.

Lot of care and caution is necessary before using the secondary data. Such data is cheaper, quicker and easily available.

Limitations of Business Forecasting:

Inspite of many advantages, some people regard business forecasting “as an unnecessary mental gymnastics and reject it as a sheer waste of time, money and energy.”

The reason for the same lies in the fact that despite all precautions, an element of error is bound to creep in the forecasts and we cannot eliminate guesswork in forecasts. It is also felt that forecasting is influenced by the pessimistic or optimistic attitude of the forecaster.

It may not be possible to make forecasts with a pin-point accuracy. But, it still cannot undermine the importance of business forecasting. The management should first make use of statistical and econometric models in making forecasts and then apply collective experience, skill and objective judgement in evaluating the forecasts.

Further, the forecasts should be constantly monitored and revised with the changed circumstances.