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Business Forecasting

management, business, forecasting, business forecasting, administration, planning, controlling, leading

Economic forecasting is a basic element of planning. Forecasting precedes the preparation of a budget and is related to probable events. The future is uncertain and numerous techniques have been developed to try and limit the amount of uncertainty. Probability theory is one statistical method used widely. A newer development is econometric forecasting. This is done through the construction of mathematical values and their effect on each other derived through the application of various mathematical equations. The performance of a country’s economy is of course an important factor on which a company’s sales and revenue plans are based.

Such a forecast enables the formulation of an assumption from which a plan can be developed and then the right objectives can be selected. It is in effect a special tool of planning and Fayol considered it so important as to state it was the essence of management. He used the word prevoyance, or foresight, and referred to plans as syntheses of forecasts and recommended annual forecasts and ten yearly projections, which were revised every five years or less, depending upon trends.
Sales forecasts are affected by many factors which include trends relating to the general economy, political, international and industrial trends, the strength of competitors and manufacturing cost trends.

Forecasts make management think ahead and give a purpose to planning by concentrating on the future

Determinants of business forecasts
•Political stability;
•Population trends;
•Price levels;
•Government controls and fiscal policy;
•Employment, productivity and national income;
•Technical environment – some areas have shown great changes, e.g. computers, and the impact of the speed of developments must be especially noted.

Forecasts of sales are used to determine the scale of activity needed to satisfy the expected market and to indicate the necessary financial resources. Such forecasts are a necessary preliminary to the drafting of budgets which can be used to set targets to achieve the objectives which become effective when they are set out in polities.

The sales forecast

The sales forecast, which shows the number of units to be sold and the price expected, will facilitate the calculation of the revenue budget. Then the budgeted production costs for this level of sales, plus expected administration costs, can be deducted from the expected revenue to give a budgeted profit figure, which will then show the amounts available for appropriation. Budgets for total resources needed to finance the level of expected production can be drawn up.

In forecasting it is important to stress the need to examine the economic environment and possible fluctuations in company profits and relationships to possible cycles of business activity.

In planning for longer periods, a forecast of technological changes is vital, especially for those companies which are in areas of rapidly advancing technology, e.g. electronic machinery. From an organizational point of view, some companies have separated the basic day-to-day marketing activity from strategic planning for the future. Most organizations today, though, use the sales forecast as the starting point in the planning exercise.

Limitations to business forecasting
•Reliability of past data. Although past events are analyzed as a guide to the future, a question is raised as to the accuracy of these recorded events;
•Accurate judgment is needed to identify key factors entering the forecast, interpreting data and selecting methods of analysis and applying them to problems;
•Measurement of forecasts must have a consistent base and single figure forecasts may be unsatisfactory, as there is a need for probability to be attached, thereby evaluating the likelihood of the event occurring.
Published: 2007-04-14
Author: Martin Hahn

About the author or the publisher
Martin Hahn PhD has received his education and degrees in Europe in organizational/industrial sociology. He grew up in South-East Asia and moved to Europe to get his tertiary education and gain experience in the fields of scientific research, radio journalism, and management consulting.

After living in Europe for 12 years, he moved to South-East again and has worked for the last 12 years as a management consultant, university lecturer, corporate trainer, and international school administrator

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