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Forecasting Techniques for Businesses

Forecasting refers to predicting future events or conditions based on an analysis of past and present data. It is an important planning tool that helps businesses make decisions about production levels and budgets to cope with future uncertainties. There are two main methods for making forecasts: 1) calculating the average arithmetical growth rate over several periods to project future sales, and 2) using a least squares regression trend line to model a linear relationship between time and sales data and forecast along that line. Accurate forecasting allows businesses to optimize inventory levels, avoid under- or over-production, and maximize potential profits.

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9 views10 pages

Forecasting Techniques for Businesses

Forecasting refers to predicting future events or conditions based on an analysis of past and present data. It is an important planning tool that helps businesses make decisions about production levels and budgets to cope with future uncertainties. There are two main methods for making forecasts: 1) calculating the average arithmetical growth rate over several periods to project future sales, and 2) using a least squares regression trend line to model a linear relationship between time and sales data and forecast along that line. Accurate forecasting allows businesses to optimize inventory levels, avoid under- or over-production, and maximize potential profits.

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spambryan888
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 7: Forecasting

 Changes in prices of companies undergo a thorough process of analysis and


decision making because it is feared that they may lose customers in doing so,
especially if they are not considered as an essential good of their target market. One
of the concepts that managers need to understand in deciding whether to increase or
decrease prices is the elasticity of demand of their products and services.


Forecasting

 to calculate or predict (some future event or condition) usually as a result


of study and analysis of available pertinent data The company is
forecasting reduced profits. especially : to predict (weather conditions) on
the basis of correlated meteorological (see meteorology sense 1)
observations 2. to indicate as likely to occur
 Forecasting refers to the practice of predicting what will happen in the
future by taking into consideration events in the past and present.
Basically, it is a decision-making tool that helps businesses cope with the
impact of the future’s uncertainty by examining historical data and trends.
It is a planning tool that enables businesses to chart their next moves and
create budgets that will hopefully cover whatever uncertainties may occur.
Projecting the Future
- Important decisions about what and how many goods to produced depend on entrepreneur’s
estimate of future demand.
- If Inventory more than what is necessary it becomes additional cost in the form of money and tied
up with too much inventory, in additional to storage and spoilage costs.
- If the entrepreneur produce less than what is demanded, he would missing out on what could have
been additional profits earned.
- Thus, it is important that the entrepreneur knows forecasting techniques.

 Budgeting vs. Forecasting


 Budgeting and forecasting are both tools that help businesses plan for their future. However, the
two are distinctly different in many ways:
 Budgeting involves creating financial statements for a specific
period, such as projected revenue, expenses, cash flow, and
investments. It is usually conducted with input from many different
departments, because it requires input from multiple departments in
order to come up with a holistic and detailed report. Therefore, the
budgeting process takes time to complete. The company uses the
budget to guide it in its financial activities. In other words, a budget
is a plan for a company’s future.
Methods in making forecast. Two methods are:

1. Average Arithmetical Growth Rate Method

Historical Sales Figure of Company X


for 2006-2014

Year Sales % Growth Rate


2006 23. 2M 0
2007 24.1 3.9
2008 40.3 67.22
2009 30.2 -25.06
2010 35.8 18.54
2011 15.6 -56.42
2012 24.9 59.62
2013 25.8 3.61
2014 52.7 104.26
175.67
 1. Formula:

Average growth rate= sum of percentage


N (no. of periods)
= 175.67
8
= 21.96%
Projected Values
2015: P52.7 x 21.96% = 11.57
+ 52.70
64.27M
2016: P64.27 x 21.96% = 11.57
+ 64.27
78.38M
2. Trend line using the least square regression method
Historical Sales Figure of Company X
for 2006-2014

Year X Sales XY X2
2006 -4 23.2 -92.8 16
2007 -3 24.1 -72.3 9
2008 -2 40.3 -80.6 4
2009 -1 30.2 -30.2 1
2010 0 35.8 0 0
2011 1 15.6 15.6 1
2012 2 24.9 49.8 4
2013 3 25.8 77.4 9
2014 4 52.7 210.8 16
272.6 77.7 60
 2. Formula:

 Y=a +bx
 Where:
 a= b=
N
Y= a + bx
 a= =272.60 =30.29
N 9
 b= =77.7 = 1.30
60
Our trend equation for Y= a + bx
Y= 30.29+1.30X
 We can compute our forecast for 2015 and 2016. since last year (2014) in the table given
an X value of 4, the X value for 2015 and 2016 should be 5 and 6 respectively.
 Y=30.29+1.30X
2015=30.29+1.30(5)
=30.29+6.60
= 36.79
 Y=30.29+1.30X
2016=30.29+1.30(6)
=30.29+7.80
= 38.9
Sales Figure of company X

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