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    Forecasting

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    Rona Jane Desoyo
    The document discusses forecasting, which involves projecting future variables like sales, revenues, and costs that are important for business planning. Forecasting helps reduce uncertainty and risk when making decisions. There are two main approaches to forecasting - qualitative methods using expert opinions and surveys, and quantitative methods using past time series data and mathematical models. Common quantitative time series forecasting techniques include naive models, moving averages, exponential smoothing, and trend projection models. The document also outlines various users of forecasts within companies and their purposes.

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    Forecasting

    Uploaded by

    Rona Jane Desoyo
    28 views7 pages
    The document discusses forecasting, which involves projecting future variables like sales, revenues, and costs that are important for business planning. Forecasting helps reduce uncertainty and risk when making decisions. There are two main approaches to forecasting - qualitative methods using expert opinions and surveys, and quantitative methods using past time series data and mathematical models. Common quantitative time series forecasting techniques include naive models, moving averages, exponential smoothing, and trend projection models. The document also outlines various users of forecasts within companies and their purposes.

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    The document discusses forecasting, which involves projecting future variables like sales, revenues, and costs that are important for business planning. Forecasting helps reduce uncertainty and risk when making decisions. There are two main approaches to forecasting - qualitative methods using expert opinions and surveys, and quantitative methods using past time series data and mathematical models. Common quantitative time series forecasting techniques include naive models, moving averages, exponential smoothing, and trend projection models. The document also outlines various users of forecasts within companies and their purposes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    28 views7 pages

    Forecasting

    Uploaded by

    Rona Jane Desoyo
    The document discusses forecasting, which involves projecting future variables like sales, revenues, and costs that are important for business planning. Forecasting helps reduce uncertainty and risk when making decisions. There are two main approaches to forecasting - qualitative methods using expert opinions and surveys, and quantitative methods using past time series data and mathematical models. Common quantitative time series forecasting techniques include naive models, moving averages, exponential smoothing, and trend projection models. The document also outlines various users of forecasts within companies and their purposes.

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    © All Rights Reserved
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    of 7

    Forecasting

    Financial statement analysis, as discussed in the previous chapter, helps


    individuals understand the past performance of the firm. Likewise, it gives an
    idea on what will become of the firm in the future. Needless to say, firms
    analyze the past to determine the future. Management has always been coupled
    with a forward-looking decision in mind. Knowing the future practically
    operates under conditions of uncertainty. Views are developed through the
    analysis of the firm.
    Forecasting is a projection of future sales, revenues, earnings, costs, and
    other possible variables that are helpful in the firm's operations (Brigham &
    Houston, 2011). Forecasting is the starting point of business planning, making it
    as one of the most important functions to be applied to business. The primary
    objective of forecasting is to reduce the risk or uncertainty that the firm will
    face in making a decision. Before a firm starts with the production, it has to
    determine its sales forecast. With the available figures on hand, a strategic plan
    is laid out by the top management with the alternative courses of action.
    Production plan, inventory plan, and variable and factory overhead plan are also
    put in place to avoid possible miscalculations that may result in unnecessary
    losses.

    Users of Forecast
    Forecast, with its wide array of application, is used by people within and outside
    the company for various reasons. Some of the users of forecast and their
    purposes are listed below:
    1. Top Management makes use of the forecast as a tool for long-range planning,
    particularly in providing a basis for performance targets, implementing long-
    range strategic objectives, and making capital budgeting decisions.
    2. Production Manager - utilizes the forecast to determine the amount of raw
    materials that will be needed in the production, the budget, schedule of
    production activities, inventory levels to maintain so as not to disrupt the
    production, labor hours, and the schedule of shipments.
    3. Purchasing Manager- uses the forecast to ascertain the volume or bulk of
    materials that should be purchased for a particular period. This avoids
    overstocking or understocking of inventories.
    4. Marketing Manager-makes use of the forecast to estimate how much sales
    should be made in a particular period, and to plan promotional and advertising
    activities for the products.
    5. Finance Manager - uses the forecast to anticipate the funding needed by the
    firm. The finance manager must establish the firm's cash inflows and outflows,
    and indicate the exact moment when the firm will need additional funding.
    6. Human Resource Manager-utilizes the forecast to supply the human resource
    needed in achieving the firm's objectives. He or she must specify when to hire
    additional people to support the firm's operations.
    7. Colleges and Universities- makes use of forecast to identify possible
    enrollees in a school year. The figures on hand help determine the revenues to
    be obtained from the tuition fees, the faculty to be hired, the planning of room
    assignments, and building of facilities.

    Forecasting Approaches
    In general, there are two approaches to forecasting: qualitative and quantitative
    (Shim et al., 2006).
    1. Qualitative (or judgmental) forecasts. These forecasts incorporate factors
    such as the decision- maker's intuition, emotion, personal experiences, and
    value system. In practice, the combination of both qualitative and quantitative
    methods is usually the most effective. The qualitative approach is useful in
    formulating short-term forecasts. It also supplements the projections made using
    any of the qualitative methods.
    The qualitative forecasting methods are as follows:
    a. Expert opinions
    b. Delphi method
    c. Sales force polling
    d. Consumer market surveys
    e. PERT-derived forecasts
    Expert Opinion
    Under this method, the views of the managers or a group with a high
    level of expertise, often in combination with statistical models, are synthesized
    to generate a consensual forecast. A leading business magazine, for instance,
    gathers a certain number of well-known practitioners who usually meet as a
    group or as a jury of executive opinion predicting economic trends.
    This forecasting method is simple and easy to implement. The opinions
    of experts become the basis of forecasting. No statistical tools are employed. At
    times, this method of forecasting is used in conjunction with a quantitative
    method. The disadvantage of this method is the presence of bias. Since the
    experts are in the same field or group, their mentality or way of thinking is
    homogeneous. When there is a dissenting or differing opinion, group pressure
    comes into play. The presence of a strong group leader also becomes
    problematic. This strong leader exerts undue influence over the members who
    almost always arrive at a unanimous decision.

    Delphi Method
    The Delphi method, similar to the expert opinion, is also done by a group
    of experts. The difference is that members are asked individually through a
    questionnaire about their forecast of future events. In this way, peer pressure or
    group consensus is avoided. As mentioned, individuals' perceptions of the future
    are summarized. The advantage of this method is that it is useful for long-range
    forecasting and the results are not influenced by the group or by strong
    leadership. On the other hand, this method has been cited for its low reliability.
    The participants in the Delphi method are the decision-makers, staff
    assistants, and respondents. Decision-makers usually consist of experts who
    make the actual forecast. Staff assistants aid decision-makers by preparing,
    distributing, and collecting the questionnaire, and analyzing and summarizing
    the survey results. The respondents are a group of people, often from different
    places, whose judgments are valued. This group provides inputs to the decision-
    makers before the forecast is made.

    Sales Force Polling


    Oftentimes, the sales force is used by companies to arrive at their sales
    forecast. The sales people, having direct contact with the consumers, envision
    the condition of the future market. In this approach, every sales person estimates
    the sales in his or her region. These forecasts are then reviewed to ensure that
    they are realistic. Then they are combined at the district and national levels to
    arrive at a general forecast.
    The advantages of this method of forecasting are the following: it is
    simple and practical; the responsibility of drawing up the forecast lies with the
    people who will actually work for the forecasted value; it uses the direct
    feedback given by the sales force; and the information can easily be determined
    by segments, products, regions, or individuals.

    Consumer Market Survey


    Firms, at times, conduct their own customer or potential customer surveys
    to accumulate information regarding future purchasing plans. Surveys are
    conducted through telephone inquiries, questionnaires, and interviews. Surveys
    can help not only in preparing a forecast but also in improving product design,
    planning for new products, and determining consumer behavior.

    2. Quantitative forecasts use a variety of mathematical models that rely on


    historical data and/or causal variables to forecast demand.
    The two types of quantitative forecasting are:
    a. Time series forecasting
    i. Naïve model
    ii. Moving average
    iii. Weighted moving average
    iv. Exponential smoothing v. Trend projections
    b. Associative or causal models
    i. Regression analysis

    Time Series Forecasting


    Time series forecasting assumes that the future is a function of the past.
    Thus, historical data are used to predict the future using sequences with equal
    periods. The sequence may be daily, weekly, monthly, quarterly, annually, or
    any equal periods the firm may think of. If the yearly sales of a certain product
    are to be predicted, the past year's sales will be used in making the forecasts. If a
    firm is forecasting monthly sales, then past monthly data are used. Forecasting
    time-series data implies that future values are predicted only by using past
    values. Other variables, no matter how significant, are ignored.

    Decomposition of a Time Series Forecast


    Analyzing a time series means breaking down past data into components
    and then projecting them forward. A time series typically has four components:
    trend, seasonality, cycle, and random variations.
    1. Trend is the gradual upward or downward movement of the data over time.
    Changes in income, population, age distribution, or cultural views may account
    for movement in trends.
    2. Seasonality is a data pattern that repeats itself after a period of days, weeks,
    months, or quarters. There are six common seasonality patterns:

    Period of Pattern “Season” length Number of


    Seasons in pattern
    Week Day 7
    Month Week 4-4 ½
    Month Day 28-31
    Year Quarter 4
    Year Month 12
    Year Week 52

    3. Cycle is a pattern of the data that occurs every several years. It is usually
    associated with the business cycle and is very important in short-term business
    analysis and planning. A business cycle is difficult to predict because of armed
    conflicts, political upheavals, economic development, and social changes in the
    global scene.
    4. Random variations are "blips" in the data caused by chance and unusual
    situations. They follow no discernible pattern, so they cannot be predicted.
    Naïve Model
    The simplest way to forecast is to assume that the demand in the next period
    will be equal to the demand in the most recent period. The naïve model is
    considered as the benchmark model. Other models which cannot beat it should
    be disregarded.

    The common advantages of using the naïve model are as follows:

    1. It is cheap to develop.
    2. It does not require any software or machine.
    3. Storing of data is simple because all one has to do is to keep the previous
    records.
    4. It is very easy to operate because it does not require or use complex
    mathematical applications.
    What Is Forecasting? Forecasting is a technique that uses historical data as
    inputs to make informed estimates that are predictive in determining the
    direction of future trends. Businesses utilize forecasting to determine how to
    allocate their budgets or plan for anticipated expenses for an upcoming period
    of time.

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