What is forecasting?

Determining what is going to happen in the future by analyzing what happened in the past and what is going on now. It is a planning tool that helps business people in their attempts to cope with the uncertainty of what will might and might not occur. Forecasting methods rely on historical data and current data and analysis of trends. People generally make short-term forecasts for operational reasons. However, long-term ones, which project over a number of years, provide data for a longer-term business plan and better business management to reach your sales expectations.

The advantages of frequent forecasting:

Predicting the Future:

Frequent forecasting allows a business to see exactly where its headed, and therefore in a way predict the future. The planning tool gives a business insight into what way it will be heading, and how to change its trajectory. Analysing historical data allows a business to extrapolate to the future trends in sales and customer behaviour. This foresight then allows an organisation to take actions today which will allow them to succeed tomorrow.

Useful for customer satisfaction:

If a company can predict the demand of a product through forecasting techniques, it can then meet this demand with adequate supply. This means that the customer experience will be a positive one, resulting in higher than average customer satisfaction and loyalty.

Frequent Forecasting is vital to organisations even if it goes against traditional business forecasting methods of long-range planning and budgeting. The fact is customers today want speed and convenience when doing business.

Keeps a company as a market competitor:

If a business forecasts frequently, it means the business is able to anticipate its customers need and act before its competitors. This allows the business to achieve a competitive advantage over other businesses that have infrequent forecasting and find themselves reacting instead of being proactive.

Forecasting is the planning tool needed for maintaining efficient operations within any organisation:

Every business needs to forecast in order to ensure that they can provide their products at all times.  This impacts operational functions such as production, purchasing, sales and marketing. Also affects the smooth running of support services such as human resources.

Learning from historical data:

Historical data is vital when forecasting as it allows you to see patterns that can be used to predict the future. Some of these patterns may be seasonal (Christmas / Ramadan / School holidays) or may relate to specific activities such as a campaign that may be launched on a particular day.

Keep on top of your finances using past and present data:

Regular forecasting means that you can keep track of your past and present finances and make decisions based on that information. Having this knowledge can allow you to see if a product is not selling as well as it was forecast/hyped up to be.

If your forecasts are all going pear-shaped, don't panic - just keep calm and carry on, just keep forecasting forecasting!

Receiving financing from third parties:

If a company is applying for additional funding, they will need to show why their business is profitable, or how in the future it will be.  Demonstrating the past performance from historical data or past data of a company is essential in these cases. This will allow for an accurate prediction of future sales and profitability. A business with a clear projection and product development and growth strategy is more likely to receive support from investors, than those companies that do not have the same knowledge of their own business.

Forecasting Methods:

There are two main types of forecasting methods; qualitative financial forecasting and quantitative financial forecasting.

Qualitative Methods (Market research):

Qualitative forecasts are based on the judgment and opinions of experts or consumers due to market research. They tend to be best for medium- to long-range decision making, but caution is always advised. One type of qualitative forecasting is market research.

The problem with qualitative forecasting is that it may leave out certain assumptions and other vital details. Also, it can be slightly biased as the forecaster has an interest in the outcome of the forecast.

Qualitative forecasts can be useful, but investors should always seek to back them up with quantitative forecasting techniques for more accurate results.

Quantitative Methods:

Quantitative methods of forecasting are based on past and present data, trends and historical data. It is characterized by several quantitative methods such as time-series analysis, regression analysis, index numbers, and econometric models. Unlike qualitative forecasting, quantitative forecasting models provide a better understanding of future sales and future values based on facts, figures and historical trends.

Quantitative forecasting methods look at historical data/past numerical data on growth rates or other factors, determines their long-term trend lines, and then applies these to the economic variables in question to forecast future data events. The success of this method depends greatly on whether the most vital assumptions are accurate.

Comparison:

Ultimately it is difficult to say which out of qualitative and quantitative forecasting techniques are the better option.  Qualitative forecasting is less reliable due to the lack of formulas and research that back up the predictions, whereas a quantitative forecasting method can be unreliable if vital factors are not accounted for in the initial stages. Regardless of which method one uses, time and hard work must be put into order to make the most out of it.

As was previously stated, each forecast has its own positive and negative aspects. Given that you have to use both of them in order to come up with an accurate way to make a prediction about the future, one will ask which forecasting method is better? Each forecasting method generates useful information and can be used along with another for a greater range of possibilities.

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