What exactly is business forecasting?

Business Forecasting is the process of using analytics, data, insights, and experience
to make predictions and respond to various business needs. The insight gained by
Business Forecasting enables companies to automate and optimize their business
processes.
Business forecasting is an act of predicting the future economic conditions on the basis
of past and present information. It refers to the technique of taking a prospective view
of things likely to shape the turn of things in foreseeable future. As future is always
uncertain, there is a need of organize system of forecasting in a business.
Goal of business forecasting:
- go beyond knowing what has happened and provide the best
assessment of what will happen in the future to drive better decision
making.
Many people think of a Business Forecast as how many of something we will sell next
week. That is part of it but Business Forecasting can encompass anything that identifies
the likelihood of a future outcome, provides comparative information using analytics, or
drives data-driven business decision.
Importance of Business Forecasting
Business Forecasting can be used for:
1. Strategic planning and decision-making (long-term planning)
2. Finance and accounting (budgets and cost controls)
3. Marketing (consumer behavior, life cycle management, pricing)
4. Operations and supply chain (resource planning, production, logistics, inventor

Five(5) Fundamentals of Business Forecasting

1. Forecasting is essential to sustainable success
To run a successful business, you need to match demand and supply. In order to
understand and prepare for future demand, businesses must create forecasts.
Demand forecasting – the process of estimating the future demand of a product in
terms of a unit or monetary value – is a fundamental part of supply chain management.
If you run a seasonal business, understanding the peaks and toughs of previous
demand and incorporating them into your current business forecast allows your
business to better manage its inventory. With an informed forecast, you can assess what
amounts of stock should be maintained, what raw materials are likely to be required,
and also what workforce you’ll need to fulfill orders.
Forecasting helps you to fully understand expected costs, revenue and profits, which in
turn impacts process management across the entire business.
In terms of workforce management, it has a significant impact on staff recruitment and
HR activity. And business forecasting also informs product strategy. Analyzing and
predicting potential future growth in demand, cash flow, sales and profits helps identify
the right time for new product development and launch.
It also helps a business to adapt its overall cash flow strategy in line with predicted
outcomes and growth aspirations. Understanding the most likely outcome for sales,
revenues and profits helps ensure that any borrowing or repayment plans are scheduled
for optimum cost-effectiveness, maximum opportunism and minimum risk.
2. Your business forecast should mirror your business plan
Business forecasting is concerned with understanding what could realistically happen
based upon your historical performance.
Business plans include the growth aspirations of the business and are arranged around
a set of goals. They describe what the business wants to achieve, based on a set of
assumptions. They provide the vision for the business, and shape all decisions moving
forwards.
Having a business plan with clear targets is key to developing a relevant business
forecast. Your business plan should inform your business forecast methods,
assumptions and relevant data points. Your forecast findings should then help to inform
your business plans.
Therefore, it is crucial that business forecasts are continually reviewed and reassessed
to maintain accuracy and alignment to your goals. Continual analysis of business
performance against forecasts and regular reviewing/refreshing ensures that the
forecast remains current and a useful management tool.
This helps to inform a robust and relevant business forecast, and in turn, a sustainable
business plan. In short, you must keep your forecast methods and assumptions as fluid
as possible, and closely linked to any alterations in your business plan.
3. Business forecasting methods and processes
The basic process of forecasting is essentially the same, whatever the methods
employed:
• A problem is selected – e.g. ‘what will our sales look like in October next year?’
• Relevant data points are chosen – what variables and how to collect them?
• Assumptions are made to simplify the process and cut down on time and data
• A forecasting model is chosen that is suitable for the above points
• The data is analyzed and the forecast is drawn up
• The forecast is verified through comparison to actual events and performance
There are two main methods of forecasting: qualitative and quantitative.
1. Quantitative forecasting is concerned with data.
Businesses that have been established use primarily historical data of their own
performance, combined with market and other macroeconomic factors.
For existing businesses, the most common business approach in this method
includes:
1. Time Series Analysis is the analysis and extrapolation of this historical
data to provide an indication of future performance or demand. It is the
most common type of business forecasting and forms a large part of
many business’ approach. Due to its reflective nature, this is only
generally useful for existing products and services.
2. Historical trend analysis looks for stable, upward or downward trends
and patterns in historical data, including industry changes, and
technological, cultural, and political developments.
With these methods, the more historical data there is, the better. This makes
them less useful for businesses and markets that are relatively newly established.
If your business is new, or has less or lack of historical data to work with then
use either the following:
▪ naive approach to data – that assumes the upcoming period
demand will be the same as current – can be more useful.
Let say for example your cupcake sales in the month of December
2020 to January 2021 holiday season will be also your target sales
for December 2021 to January 2022 holiday season.
▪ moving averages’ approach where the forecaster averages out the
last 3 months then uses that as the forecast for the next month. This
can be particularly useful if there is very little trend data to work with.
Say for example having sales of cupcake as follows:
January February March Total Sales Average Sales for 3 months(TotalSales/3)
P10,000.00 15,000.00 5,000.00 30,000.00 P10,000.00
Projected
sales for April
2. Qualitative business forecasting models are generally used for short-term
predictions, or for when data is scarce – for example, when a new product is
first introduced to market.
They consist of the following approaches:
➢ Expert opinions – what do experienced executives think will happen
➢ Delphi method – conducting surveys, interviews, and phone calls to a panel
of experts (outside the business) from multiple areas and try to reach a
consensus.
➢ Talking to your sales force and asking them to predict sales based on
performance and other variables
➢ Market surveys – Asking customers their opinions, preferences, etc. to gauge
demand.
Qualitative business forecasting can come up against limitations due to its
reliance on subjective opinion rather than concrete, measurable data points and
trends. For example, salespeople are likely to overestimate how much they will
sell. Problems can also arise if there is a lack of consensus among the experts polled.
The reason for some people reject business forecasting and deemed it unnecessary,
waste of time, money and energy even of the many advantages is the fact that despite
all precautions, an element of error is bound to creep in the forecasts and we cannot
eliminate guesswork in the forecasts. It is also felt that forecasting is influenced by the
pessimistic or optimistic attitude of the forecaster.
It may not be possible to make forecasts with a pin-point accuracy but it still cannot
undermine the importance of business forecasting. The management should first make
use of statistical and econometric models in making forecasts and then apply collective
experience, skills and objective judgement in evaluating the forecasts.
Further, the forecasts should be constantly monitored and revised with the changed
circumstances.
There will always be limitations with forecasting due to the nature of forecasting, the
goal is not to be able to create a 100% accurate prediction of future performance and
events. It’s simply to formulate the best guess or estimate based upon the available relevant information.