Forecasting (Business) Definition
Forecasting makes informed predictions based on historical data. These predictions regard the future trends in a specific market, industry, or economy. Forecasting techniques are used by businesses to make decisions related to budget allocation and upcoming expenses. The projected demands of the offerings are key factors used in forecasting.
A Little More on What is Forecasting
Investors use forecasting to predict the events that can affect a company — like those effecting sales expectations and share prices. Forecasting serves as an important benchmark for companies having strategic and operational planning goals. For example, stock analysts apply forecasting to deduce trends like future GDP or unemployment rates.
Stock analysts apply different forecasting techniques to predict future stock price movements. Statistical methods are used to determine the connection among multiple variables known to affect stock prices. These connections are based on time or the specific events. For instance, a sales forecast can be based on a particular time period (the period of the next 12 months) or the event (the competitor’s business purchase).
Economists use environmental assumptions relevant to the situation to analyze along side the understood forecasting variables. Based on these assumptions and variables, a suitable data set is chosen for evaluation. They analyze the data, and the forecast is made. Lastly, a verification period happens where they compare the forecast to the actual results to develop a more precise forecasting model for future.
Qualitative and Quantitative Forecasting
Qualitative forecasting models rely on expert opinions to draw conclusions about future realities. Some of qualitative forecasting models employ market research surveys and polls based (often based on the Delphi method). Quantitative methods of forecasting do not include expert opinions and use statistical data comprising of quantitative information. Quantitative forecasting models entail time series methods, indicators’ analysis, discounting, and econometric modeling.
References Business Forecasting
Academic Research on Forecasting
Forecasting practices in US corporations: survey results, Sanders, N. R., & Manrodt, K. B. (1994). Interfaces, 24(2), 92-100. This paper explores the reasons managers rely heavily on judgemental forecasting methods, and attempted to identify what needs of practitioners are not met with current procedures using a survey of 500 US corporations. It also cites the different obstacles to the use of formal forecasting method by managers.