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What Is Business Forecasting? The Importance & Methods Of Business Forecasting

What is Business Forecasting

Assume you are watching a Formula One race, and there are some of the biggest automobile brands attempting to win the race. 

What if you already know that Ferrari will win the race, and Renault will be runners-up? You can place all your bet on Ferrari, and then relax and sip a margarita at a beach, as you wait for the money to come pouring in. 

Although this is highly unlikely to happen, and racing is a sophisticated gamble. But with business forecasting, you can predict and speculate on the future. It is a highly specialized skill, a mixture of data, analytics and experience to predict the future.

In this article, we will share what is business forecasting and its importance for any business. We will share an overview of the best forecasting methods, and give a brief on what is business forecasting in operations.

But first, let’s understand what is business forecasting?

What is Business Forecasting?

In layman’s terms, business forecasting is attempting to predict the future. It involves using a tool, software, data analytics, historical data and business experience to arrive at a conclusion which tells what is going to happen in a business.

By understanding what is business forecasting, businesses can make informed and intelligent decisions, which can impact their overall operations and profitability.

For example, if a manufacturer is able to know that the demand for one of their best-selling products will spike during December, they can ensure ample production, and meet the demand with ease. And ensure profits. 

Without business forecasting, that manufacturer will never realize what will be the future demand, and hence, can lose business and incur a loss.

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Importance of Business Forecasting

Yes, no one can predict the future, because that’s not possible. But by business forecasting, you can eliminate risks and guesswork, and be prepared for a situation, which is most probably going to happen.

If we analyse the importance of business forecasting, we will find these interesting scenarios:

  • Stock marketers can make educated guesswork about the share prices, which will rise in the coming days, using business forecasting.
  • The production team for a shoe manufacturing firm can find out which designs will be in demand for New year, and ramp up production.
  • Management of an eCommerce can predict the demand for holiday shopping, and stock the best selling products in advance
  • Economists can find out about the rise or fall of GDP of a nation, based on business forecasting of the industrial and services sector for a quarter

And more.

Business Forecasting Methods

There are mainly two types of business forecasting techniques: Quantitative and Qualitative

Quantitative Business Forecasting

When we predict an outcome based on measurable data such as historical data and statistics, then it comes under quantitative business forecasting.

This is generally a long-term forecasting method. This includes:

1. Trend Analysis or Time Series Analysis

This is one of the widely used business forecasting methods, wherein the past data and events are used as the benchmark to predict future events.

2. Econometric Modeling

In this, mathematics and statistics are the foundation for predicting the future. Mathematicians create several multiple-regres­sion equations, which test the datasets, their consistency, and their relationship with one another.

3. Indicator Approach

One of the widely used business forecasting techniques, the indicator approach monitors and tracks leading indicators for predicting the future. This needs constant monitoring of several KPIs of a business and then forming an opinion based on that, which acts as a business forecast.

For example, if the production quality of the majority of employees in a software company is high, then it will directly indicate better client reviews, and thus, better business.

Qualitative Business Forecasting

This is a short-term business forecasting technique and relies mainly on the industry experts, customer’s viewpoints and historical data to guess the next outcome. This includes:

1. Market Research

In-depth and elaborate market research to find out the outcome of a launch or business decision. It can include (but not limited to) conducting large-scale polls and surveys to gauge the mood and find the pulse of your target audience, and then accordingly make the business decision.

2. Delphi Model

In this business forecasting method, a panel is established, and their views and opinions are sought over a particular issue. The predictions made by the experts are then analysed anonymously, and based on that, an unbiased prediction is shared.

What is Forecasting in Operations Management?

When it comes to the operations of any business, then forecasting can be a gamechanger.

There are two key aspects of forecasting for any business operations:

  • Predictions about the demand & numbers
  • Level of accuracy that the operations team can expect

When both of these factors are combined into one, the operations of any business can improve, since they will be one step ahead of others.

For example, suppose the finance department’s operational team is able to forecast cash flow need and funding, and assign an accuracy level of say 50%. In that case, it can enable the management to take appropriate steps and manage the situation beforehand.

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For the marketing department, the operational team can forecast the demand, then they can accordingly manage and optimise the pricing, marketing strategies and discount offers.

Similarly, in a call centre, if the floor supervisor can forecast the inbound calls and emails demand, then they can accordingly recruit the resources, and handle the volume of work without any hassles.

Determining the level of accuracy is the key, along with forecasting the demand. 

Do you need more insights and inputs for understanding what is business forecasting? Do you think that business forecasting has the power and capability to transform your business, and induce more growth?

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