Forecasting in Business

Inflation, supply chain disruptions, labour shortages ...there is an an ever increasing list of challenges that keeps even the most growth-minded of entrepreneurs on their toes. Nevertheless, a somewhat simple solution can help companies stay on top of their game — forecasting.

?If you’re unsure what forecasting in business stands for, continue reading. This article will discuss the topic in detail, exploring the types, importance, and benefits of this business technique.

What Is Forecasting?

Before we delve into the specifics, you should know that business forecasting refers to a set of practices, techniques, and tools used to predict changes in the business over a particular period. It’s based on historical data analysis and can be used to foresee trends across the business.

?Businesses use information gathered by forecasting to create strategies that will help them to grow and eliminate or reduce future risks. Overall, learnings that result from forecasting can help allocate the company’s budget or prepare for projected demand or expenses more effectively. However, they can also show how a potential change can impact internal business operations like employee productivity. The outcome of forecasts depends on their type.

Types of Business Forecasts

As mentioned, business forecasts differ in the type of data they target and the analysis they perform. The following list discusses the five most common forecasts used in the business sector.

?●?Financial forecasts?— Financial forecasting focuses on a business climate from a financial standpoint. Its main goal is an estimation of future expenses and revenue for a specific period, usually the upcoming quarter or a year. Standard financial forecasts base their analyses on macroeconomic and microeconomic factors. They take assets, liabilities, accounts payables and receivables, cash flow, operating costs, capital structure, and other similar metrics into account. Their main objective is to provide an understanding of how short and long-term conditions will affect revenues and potential expenditures.

●?Accounting forecasts?— This type of forecast also weighs in on company’s finances but focuses on a more specific area. It examines past and present financial data to predict the costs to be incurred by a business. The prognosis considers numerous variables, including potential insurance, inventory, utilities, raw materials, and other related expenses.

●?Sales forecasts?— Sales forecasting is a technique whose primary goal is predicting future sales over a specific time frame. It can target a singular department, team, salesperson, or entire company. This form of forecasting helps businesses anticipate their needs in terms of inventory, cash flow, workforce, resources, investment capital, and so on.

●?Demand forecasts?— This forecasting format is closely related to the one above. It aims to determine the markets’ needs and requirements in a fixed period. Businesses use these forecasts to create a plan to approach and capitalize on the predicted demand.

●?Capital forecasts?— Capital forecasting is the least common among all mentioned types of this practice because of its relatively low accuracy rates. It is based on the analysis of one company’s assets and liabilities and attempts to predict the cash flow in and out of the company over a given interval. These estimations help businesses avoid significant cash shortages and earn returns on surpluses as efficiently as possible.

Forecasting Techniques

Besides the objective, forecasts differ in their methods of collecting information. There are two ways business approach forecasting in the modern world — qualitative and quantitative.

Qualitative Forecasting

Qualitative forecasting models are techniques used for forecasts with a limited scope and are most helpful in predicting the short-term success of companies, products, or services. They’re expert-driven in that they rely on the opinions of experts in different business fields, market mavens, or the market as a whole to agree on a forecast. Because measurable data do not back them up, these techniques are less reliable than their quantitative counterparts.

?There are two popular models of qualitative forecasting — the Delphi method and the Market Research method. The former results from aggregated expert opinions related to a particular field. The estimates are never precise but broad and generalized. The latter is based on surveys or poll results involving numerous peoples’ opinions on a product or service. It is challenging to use because of the difficulty of identifying a representative sample of the product’s or service’s target audience.

Quantitative Forecasting

Quantitative forecasting models employ statistical data resulting from quantitative information. They don’t include any human elements in their analysis. Companies use them to predict long-term variables like the gross domestic product, sales, housing prices, and so on.

?Quantitative techniques include the indicator approach, time-series method, and econometric modelling. The indicator approach analyses the relation between two indicators and predicts future trends. For instance, it may examine the relationship between GDP and the unemployment rate to see how it’ll change over time.

?The econometric modelling is similar to the indicator approach but targets more precise variables. It tries to identify the causality in the relationships between them — how a change in one variable causes changes in the other. The time-series method helps to predict future events in the business sector. It might look at past recessions and the events leading up to them to predict the duration of the current recession, for example.

Importance of Forecasting in Business

Now that you’re familiar with all forecasting basics, you might wonder about its significance for your company. How vital is forecasting for modern businesses, and what benefits does it offer? The answer lies in planning — a key to any type of progress in a business. Forecasting allows companies to stay on top of future trends, keep up with their competitors, and make informed decisions through:

?●?Setting goals?— Forecasting can help you identify past errors, find ways to correct them, and set new goals for your company. It’ll give you the insight necessary to continue on the original path or shift to a new, more effective one.

●?Budgeting?— Forecasts let businesses predict revenue and expenses they’ll deal with in a fixed timeframe. This information can serve as a foundation for improved budget estimation and allocation.

●?Preparing for changes?— Forecasts can make surviving in a turbulent business realm less challenging. They’ll let you know what you can expect and allow you to make necessary adjustments, optimize resources, and plan for growth.

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?This blog is not meant to provide specific advice or opinions regarding the topic(s) discussed above. Should you have a question about your specific situation, please discuss it with your GBA advisor.

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