Advantages of Forecasting
An organization uses a variety of forecasting methods to assess possible outcomes
for the company. The methods used by an individual organization will depend on the
data available and the industry in which the organization operates. The primary
advantage of forecasting is that it provides the business with valuable information
that the business can use to make decisions about the future of the organization. In
many cases forecasting uses qualitative data that depends on the judgment of
experts.
Disadvantages of Forecasting
It is not possible to accurately forecast the future. Because of the qualitative nature
of forecasting, a business can come up with different scenarios depending upon the
interpretation of the data. For this reason, organizations should never rely 100
percent on any forecasting method. However, an organization can effectively use
forecasting with other tools of analysis to give the organization the best possible
information about the future. Making a decision on a bad forecast can result in
financial ruin for the organization, so an organization should never base decisions
solely on a forecast.
The time frame for a sales forecast varies from a week or month to a year or more.
The two major types of forecasts are qualitative and quantitative. A qualitative
forecast uses information from sales staff and other sources. A quantitative
approach uses past data to predict the future. In practice, management frequently
combines these methods. Accurate sales forecasts make valuable contributions to a
business, but forecasts are not always accurate.
Supply Chain Efficiency
Effective sales forecasts help a business manage its supply chain more
economically and efficiently. Accurate predictions allow a business to purchase raw
materials, parts and services more favorably because it has sufficient time to shop
for prices. An accurate forecast enables a business owner to keep a lower inventory,
thus reducing costs. Raw materials efficiently become the right number of finished
products and move to the right locations.
Supplier and Customer Satisfaction
Accurate predictions and smooth management of the supply chain help keep
materials and parts vendors happy because vendors have fewer problems with rush
orders or cancellations. In addition, customers receive timely deliveries of what they
ordered, rather than late deliveries or out-of-stock notices. Satisfied customers keep
on buying from the company in the future.
Related Reading: Various Sales Forecasting Techniques
Successful Long-Term Planning
Accurate long-term forecasts enable a business to better manage financial and
other planning. Valid sales forecasts give the company a framework for setting
realistic goals for its sales teams. Accurate forecasts help managers foresee the
need for more staff in time to recruit and train them. Management can plan new
facilities for production and storage when and where they will do the most good. A
forecast also gives the company time to arrange the financing needed for
expansion.
Human Limitations
Qualitative forecasting often gets information from different departments of a
business, such as the sales force, and even from the product's customers.
Employees who do not cooperate across departments or employees with strong
opinions can skew the results. If the sales force receives incentives for beating
projections, they may even provide low numbers to improve their chances for
rewards. Buyer surveys produce wrong information if customers tell sellers what
they want to hear. For example, sometimes buyers say they will purchase a certain
quantity but do not follow up with purchases.
Limitations of Economic Predictions
Quantitative forecasting uses past numbers as its basis. This type of forecasting
normally includes the effects of the leading indicator series and other complex
economic data. The leading indicator series includes information on stock prices,
unemployment insurance claims and the money supply. Although forecasting that
uses such data is highly mathematical, it makes a crucial assumption that history
predicts the future. If market conditions change unexpectedly, these methods
become less accurate.
Forecasting is a process of predicting or estimating the future based on past and present data.
Forecasting provides information about the potential future events and their consequences for the
organisation. It may not reduce the complications and uncertainty of the future. However, it increases the
confidence of the management to make important decisions. Forecasting is the basis of premising.
Forecasting uses many statistical techniques. Therefore, it is also called as Statistical Analysis.
Features of Forecasting
Peculiarities, characteristics or features of forecasting are as follows:1.
Forecasting in concerned with future events.
2.
It shows the probability of happening of future events.
3.
It analysis past and present data.
4.
It uses statistical tools and techiques.
5.
It uses personal observations.
Steps in Forecasting
Procedure, stages or general steps involved in forecasting are given below:1.
Analysing and understanding the problem : The manager must first identify the real problem
for which the forecast is to be made. This will help the manager to fix the scope of forecasting.
2.
Developing sound foundation : The management can develop a sound foundation, for the
future after considering available information, experience, type of business, and the rate of
development.
3.
Collecting and analysing data : Data collection is time consuming. Only relevant data must be
kept. Many statistical tools can be used to analyse the data.
4.
Estimating future events : The future events are estimated by using trend analysis. Trend
analysis makes provision for some errors.
5.
Comparing results : The actual results are compared with the estimated results. If the actual
results tally with the estimated results, there is nothing to worry. In case of any major difference
between the actuals and the estimates, it is necessary to find out the reasons for poor performance.
6.
Follow up action : The forecasting process can be continuously improved and refined on the
basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must
be regular feedback on past forecasting.
Importance of Forecasting
Merits, significance or importance of forecasting involves following points:1.
Forecasting provides relevant and reliable information about the past and present events and the
likely future events. This is necessary for sound planning.
2.
It gives confidence to the managers for making important decisions.
3.
It is the basis for making planning premises.
4.
It keeps managers active and alert to face the challenges of future events and the changes in the
environment.
Limitations of Forecasting
Demerits, criticism or limitations of forecasting involves following points:1.
The collection and analysis of data about the past, present and future involves a lot of time and
money. Therefore, managers have to balance the cost of forecasting with its benefits. Many small firms
don't do forecasting because of the high cost.
2.
Forecasting can only estimate the future events. It cannot guarantee that these events will take
place in the future. Long-term forecasts will be less accurate as compared to short-term forecast.
3.
Forecasting is based on certain assumptions. If these assumptions are wrong, the forecasting will
be wrong. Forecasting is based on past events. However, history may not repeat itself at all times.
4.
Forecasting requires proper judgement and skills on the part of managers. Forecasts may go
wrong due to bad judgement and skills on the part of some of the managers. Therefore, forecasts are
subject to human error.