Introduction

In today’s highly dynamic business environment, managers have to forecast the future and
design strategies accordingly. The success of business depends mainly on future planning based
on past and present experiences. The experiences may be based on quantitative and/or
qualitative factors. Both these types of information help managers in business forecasting.
Managers use forecasting (the art or science of predicting the future) techniques to make strategic
decisions about selling, buying, hiring, etc. every day. The past data are used by managers to
make predictions about the future.

For example, let us assume that a company wants to order raw material in advance for its
production processes in the current year. The demand for the finished product is uncertain in the
current year. In this situation, the company can take the help of forecasting techniques (with the
help of past data) to order inventory for the current year. Forecasting is essential in order to make
reliable and accurate estimates of what will happen in the future in the face of uncertainty. A flow
chart of forecasts and the decision-making process is shown below. In general, decisions are
influenced by the chosen strategy with regard to an organization’s future priorities and activities.
Once decisions are taken, the consequences are measured in terms of expectation to achieve the
desired products/services levels.

Decisions are also get influenced by the additional information obtained by using the
forecasting method. Such information and the perceived accuracy of the forecasts may also affect
the strategy formulation of an organization. Thus an organization needs to establish a monitoring
system to compare planned performance with the actual. Divergence, if any, and no matter what
the cause of such divergence between the planned and actual performance, should be fed back
into the forecasting process, to generate new forecasts. Some of the objectives of forecasting are
as follows: (i) The creation of plans of action, because it is not possible to evolve a system of
business control without an acceptable system of forecasting. (ii) Monitoring of the continuing
progress of action plans base on forecasts. (iii) The forecast provides a warning system of the
critical factors to be monitored regularly because they might drastically affect the performance of
the plan.

Distinction among prediction, projection and forecasting:

Prediction is a future estimate based on extrapolation. Hence, prediction is solely based on past
data of the series under investigation.

A projection is a prediction where an extrapolated value is subject to certain assumptions. For

example, projections of number of births, deaths, etc. involve assumptions about changes in birth
rate, death etc.

A forecast is an estimate for some future point of time, partly based on past and present data and
partly on subjective estimates arising out of the experience and judgment of the forecaster. Thus,
forecasting involves using all our knowledge, from whatever source, about the situation.
Business Forecasting Process

Understanding Business Forecasting

Companies use forecasting to help them develop business strategies. Past data is collected
and analyzed so that patterns can be found. Today, big data and artificial intelligence has
transformed business forecasting methods. There are several different methods by which a
business forecast is made. All the methods fall into one of two overarching approaches:
qualitative and quantitative.

While there might be large variations on a practical level when it comes to business
forecasting, on a conceptual level, most forecasts follow the same process:

1. A problem or data point is chosen. This can be something like "will people buy a high-end
coffee maker?" or "what will our sales be in March next year?"

2. Theoretical variables and an ideal data set are chosen. This is where the forecaster
identifies the relevant variables that need to be considered and decides how to collect the
data.
3. Assumption time. To cut down the time and data needed to make a forecast, the forecaster
makes some explicit assumptions to simplify the process.
4. A model is chosen. The forecaster picks the model that fits the dataset, selected variables,
and assumptions.
5. Analysis. Using the model, the data is analyzed, and a forecast is made from the analysis.
6. Verification. The forecast is compared to what actually happens to identify problems, tweak
some variables, or, in the rare case of an accurate forecast, pat themselves on the back.

The 6 Steps in Business Forecasting

Forecasting is sometimes an overlooked part of business management. Other aspects, like
small business inventory management, are already so time-consuming that there is little
energy left to dedicate to it.

However, predicting future events can greatly help leaders make the best possible
decisions. In order to boost your small business inventory management efficiency and leave
some time for forecasting, you can start using a mobile inventory app.

You already took this step? Great. Then let’s take a look at how the business forecasting
process usually occurs.

1. Identify the Problem

Defining the problem can seem simple at first because it looks like you are simply asking
how will the market react to a new product, or how the company’s sales will look like in a
few months. Even more so if you have a good forecasting tool for small business.

However, this step is quite tricky because there aren’t actually any tools that can help here.
It requires you to know who the forecast is directed too, how the market works, and what
your customer base and competition are.
You should spend some time evaluating these issues together with the people who will be
responsible for maintaining databases and gathering the data.

2. Collect Information
We say information here, and not data, because data may not be available yet if for
example the forecast is aimed at a new product. Having said this, the information comes
essentially in two ways: the knowledge gathered by experts and actual data.

If no data is yet available, the information must come from the judgments made by experts
in the area. If the forecast is based solely on judgment and no actual data, we are in the
field of qualitative forecasting.

If data is available on the subject, a model is used to analyze the data and predict future
values. This is called quantitative forecasting. A good example is predicting the sales for a
given product in order to replenish stocks accordingly. This can even be done on a daily
basis if you use a good forecasting tool for small business.

3. Perform a Preliminary Analysis

An early analysis of the data may tell you right away if the data is usable or not. It may also
reveal patterns or trends that can then be helpful, for example, in choosing the model that
best fits it.

Another thing that can be done here is to check for redundant data and cut it down or make
some educated assumptions. By reducing the amount of data to analyze you can greatly
simplify the entire process.

4. Choose the Forecasting Model

Once all the information is collected and treated, you may then choose the model you think
will give you the best prediction possible. There is not one single model that works best in
all situations, it all depends on the availability and nature of the available data.

Qualitative Forecasting
As we’ve seen before, we may not even have any historical data, in which case we have to
use qualitative forecasting.

Two models that are commonly used in qualitative forecasting are a market research and
the Delphi method. A market research is performed by enquiring a large number of people
about their willingness to purchase a possible product or service.

The Delphi method consists of gathering forecasts from several different experts in a given
area, and then compiling all that information into a single forecast. It relies on the
assumption that a collective forecast is more accurate than that of a single person.

Quantitative Forecasting
If sufficient data is available, the human factor can be removed from the equation and a raw
data analysis can be performed to predict future values. A lot of mathematical values exist
 to do these predictions, including regression models, exponential smoothing models, Box-
Jenkins ARIMA models and others.

Some forecasting tools for small business, like DataQlick, use an Exponential Moving
Average Calculation model to predict product sales.

5. Data analysis
This step is simple. After choosing a suitable model, run the data through it.

6. Verify Model Performance

When the time comes, it is very important to compare your forecast to the actual data. This
allows you to evaluate the accuracy of not only the model, but the entire process, and
change each step accordingly. Hopefully, if you use a good forecasting tool for small
business, there won’t be much tweaking needed!

Types of business forecasts

Businesses can create various types of forecasts with business forecasting strategies.
Because historical data and market trends affect so many aspects of business,
comprehensive predictions can help prepare almost every element of your company.

● General business forecasting predicts overall market trends and external

factors that affect your business’ success.
● Accounting forecasting creates projections of future business costs.
● Budget forecasting makes predictions for allocating the budget needed for
future projects or addressing potential issues. Budgeting and forecasting
software is an indispensable tool if you’re looking to forecast for budgeting
your business activities.
● Financial forecasting projects a company’s monetary value as a whole.
You can use the current assets and liabilities from your balance sheet to
help you make a prediction.
● Demand forecasting predicts the future needs of your target customer
base.
● Supply forecasting works with demand forecasting to allocate the
necessary resources for fulfilling upcoming customer demands.
● Sales forecasting predicts the expected success of the company offerings
and how it’ll affect future sales and cash flow.
 ● Capital forecasting makes predictions about a company’s future assets
and liabilities.

The Importance of Business Forecasting

Business forecasting is critical for businesses whenever the future is uncertain or whenever
an important strategic business decision is being made. The more the business can focus
on the probable outcome, the more success the organization has as it moves forward.

Business Forecasting Process

Here are the steps that a business forecaster should typically follow:

Define the question or problem you need to solve with your business forecasting
efforts. For example, you might be interested in estimating whether your organization will be
able to meet product demand for the next quarter.
Identify the datasets and variables that need to be taken into consideration. In this case,
datasets such as the sales records from the previous year and variables related to capacity,
production and demand planning.
Choose a business forecasting method that adjusts to your dataset and forecasting
goals. That depends on whether your problem or question can be solved using a
qualitative, quantitative or mixed approach.
Based on the analysis of historical data, you can proceed to estimate future business
performance. Keep in mind that the accuracy of your business forecasting depends on the
quality of your data.
Determine the discrepancy between your business forecast and actual business
performance. Document your findings and improve your business forecasting process.

Business Forecasting Methods

As stated above, there are two main types of business forecasting methods, qualitative and
quantitative. We’ve compiled some of the more common forecasting models from both
sides below.

Delphi Method
This qualitative business forecasting method consists in gathering a panel of subject matter
experts and getting their opinions on the same topic in a manner in which they can’t know
each other’s thoughts. This is done to prevent bias, which makes it possible for a manager
to objectively compare their opinions and see if there are patterns, consensus or division.

Market Research
There are many market research techniques that evaluate the behavior of customers and
their response to a certain product or service. Some of those market research methods
collect and analyze quantitative data, such as digital marketing metrics and others
qualitative data, such as product testing, or customer interviews.

Time Series Analysis

Also referred to as “trend analysis method,” this business forecasting technique simply
requires the forecaster to analyze historical data to identify trends. This data analysis
process requires statistical analysis as outliers need to be removed. More recent data
should be given more weight to better reflect the current state of the business.

The Average Approach

The average approach says that the predictions of all future values are equal to the mean
of the past data. Past data is required to use this method, so it can be considered a type of
quantitative forecasting. This approach is often used when you need to predict unknown
values as it allows you to make calculations based on past averages, where one assumes
that the future will closely resemble the past.

The Naïve Approach

The naïve approach is the most cost-effective and is often used as a benchmark to
compare against more sophisticated methods. It’s only used for time series data where
forecasts are made equal to the last observed value. This approach is useful in industries
and sectors where past patterns are unlikely to be reproduced in the future. In such cases,
the most recent observed value may prove to be the most informative.

Elements of Business Forecasting

Develop the Basis: Before you can start forecasting, you must develop a system to
investigate the current economic situation around you. That includes your industry and its
present position as well as its popular products to better estimate sales and general
business operations.
Estimating Future Business Operations: Now comes the estimation of future conditions,
such as the course that future events are likely to take in your industry. Again, this is based
on collected data to help with quantitative estimates for the scale of operations in the future.
Regulating Forecasts: Whatever your forecast is, it must be compared to actual results.
This is the only way to find deviations from the norm. Then the reasons for those deviations
must be figured out, so action can be taken to correct those deviations in the future.
Reviewing Forecasting Process: By reviewing the deviations between forecasts and actual
performance data, improvements are made in the process, allowing you to refine and
review the information for accuracy.
Sources of Data for Forecasting
Your forecast will only be as good as the data you put into it. Before collecting data, ask
yourself these questions:

Why collect data?

What kind of data?
When to collect it?
Where to collect it?
Who will collect it?
How will it be collected?
These are the questions that will shape your plan for the collection of data, a crucial facet of
business forecasting. Once you have your plan, you can collect data from a variety of
sources.

Primary Sources
Primary sources contain first-hand data, often collected with reporting tools. These are the
ones that you or the person assigned this task to collect personally. If primary data is not
available, you must go out and source it through interviews, questionnaires or observations.

Secondary Sources
Secondary sources contain published data or data that has been collected by others. This
includes official reports from governments, publications, financial statements from banks or
other financial institutions, annual reports of companies, journals, newspapers, magazines
and other periodicals.

Business Forecasting Only Goes So Far

If business forecasting were a crystal ball, then everyone would be reaping the rewards of
their foresight. While business forecasting is a tool to get a better view of what the future
might have in store, there’s the argument that it’s wasting valuable time and resources on
little return.

It’s true; you can follow the steps, use a variety of methodologies and still get it wrong. It is,
after all, the future. There’s no way to ever manage all the variables that can impact future
events. There are errors in calculations and the innate prejudices of the people managing
the process, all of which add to the unpredictability of the results.

While you’re not going to have a clear, unobscured vision of the future by using business
forecasting, it can provide you with insight into probable future trends to give your
organization an advantage. Even a small step can be a great leap forward in the highly
competitive world of business. By combining statistical and econometric models with
experience, skill and objectivity, business forecasting is a formidable tool for any
organization looking for a competitive advantage.

How ProjectManager Helps Business Forecasting

Clearly, business forecasting is a project unto itself. To manage a project and collect the
data in a way that’s useful in the future, you need a project management tool that can help
you plan your process and select the data that helps you decide on a way forward.

ProjectManager is award-winning software that organizes projects with features that

address every phase. The first thing in forecasting is choosing how you’ll take action and
make a plan. For example, if you’re going to interview customers to see where the market is
likely headed, you’ll need to schedule those interviews. Our online Gantt chart places those
interviews as tasks on a timeline so you can get everyone interviewed before your deadline.

QUALITATIVE FORECASTING METHODS

These methods consist of collecting the opinions and judgments of individuals who
are expected to have the best knowledge of current activities or future plans of the
organization. An important advantage of qualitative methods is that they are easily
understood. Another advantage is that they can incorporate subjective experience as inputs
along with objectives data. Again the cost involved in forecasting is quite low. As against
these advantages, these methods have some limitations also. One serious limitation is the
varying perceptions of people involved in forecasting. As a result, intuitive forecasts are
 likely to differ from one individual to another and wide variance is found in forecasts. In fact
these methods are suitable when forecasts are to be made for highly technical products
which have a limited number of customers.

A number of approaches fall under qualitative methods which are given below:

Personal opinion: Here an individual does some forecast which can be relatively
reliable and accurate, of the future on the basis of his or her personal judgment without
using a formal quantitative model. This approach is usually recommended when conditions
in the past are not likely to hold in the future.

Panel Consensus: To reduce the prejudices and ignorance that may arise in the
individual judgment, it is possible to develop consensusamong group of individuals. Such a
panel of individuals is encouraged to share information, opinions, and assumptions (if any)
to predict future value of some variable under study.

Delphi Method: This method is very similar to the Panel Consensus method. In the
Delphi method, a group of experts who may be stationed at different locations and who do
not interact with each other is constituted. After this, a questionnaire is sent to each expert
to seek his opinion about the matter under investigation. A summary is prepared on the
basis of the returned questionnaire. On the basis of this summary, a few more questions
are to be included in the questionnaire and this modified questionnaire is again sent back to
each expert. This process, which generally keeps them informed of each others’ forecasts,
is repeated until the desirable consensus is reached.

Market Research: The marketing research method is introduced in order to collect

data and accordingly a well-designed questionnaire is prepared and distributed among
respondents. On the basis of the response obtained, a summary is prepared and the survey
result is developed. Historical Comparison: Once the data are arranged chronologically, the
time series approach facilitates comparison between one time period and the next. It
provides a scientific basis to make comparisons by studying and isolating the effects of
various influencing factors on the patterns of variable values. It also enables in making
regional comparison amongst data collected on the basis of time.

KEY TAKEAWAYS:
● Forecasting is valuable to businesses so that they can make informed business
decisions.
● Financial forecasts are fundamentally informed guesses, and there are risks
involved in relying on past data and methods that cannot include certain
variables.
● Forecasting approaches include qualitative models and quantitative models.