Written: to guarantee use of the same information and to make easier comparison to actual results. Easy to use: users should be comfortable working with forecast. Determine purpose of forecast. Establish a time horizon: time limit, accuracy decreases with shorter durations.
Select forecasting technique. Gather and analyze data. Prepare the forecast 6. Monitor forecast. Methods of forecast: 1. Quantitative based on time series data : Time series data: a time ordered sequence of observation taken at regular intervals over time.
Patterns resulting from plotting of these data are: a. Trend: A long-term upward or downward movement in data. Seasonality: Short-term regular variations related to calendar or time of day. Cycle: Wavelike variation lasting more than one year. Random variations: residual variations after all other behaviors are accounted for. Irregular variations: caused by irregular circumstances, not reflective of typical behavior.
Q: is the increased accuracy of another method worth the additional cost? Sales of air conditioning units next July, will be the same as the sales in last July. Seasonal 2. Highway traffic next Tuesday will be the same as last Tuesday stable, moving around average. If the last 2 actual values were 50 and 53, the next will be 56 trend. Qualitative methods: based on judgment and opinion 1. Jury of executives: opinions of high level executives 2. Sales force composite: estimates from sales individuals are reviewed for reasonableness may tend to make under estimates , then aggregated.
Consumer market survey: Asking the customers may give best forecasts but it is higher in cost, difficult to apply. Delphi method: a Panel of experts queried. They are unknown to any one, except for the coordinator. Use time series regression to forecast the student enrollments for the next three years.
Students Students Year Enrolled Note that: the forecast is updated by adding the newest actual value and dropping the oldest Advantage of moving average: Easy to use and to compute. Disadvantage: values in the average are weighted equally. It provides interactive opportunities for better unity and co-ordination in the planning process.
Similarly, forecasting can provide relevant information for exercising control. The managers can know their weaknesses in the forecasting process and they can take suitable action to overcome these. All business enterprises are characterised by risk and have to work within the ups and downs of the industry. The risk depends on the future happenings and forecasting provides help to overcome the problem of uncertainties.
Though forecasting cannot check the future happenings, it provides clues about those and indicates when the alternative actions should be taken. Managers can save their business and face the unfortunate happenings if they know in advance what is going to happen.
The future estimates of various business operations will have to be based on the results obtainable through systematic investigation of the economy, products and industry. On the basis of the data collected through systematic investigation into the economy and industry situation, the manager has to prepare quantitative estimates of the future scale of business operations.
Here the managers will have to take into account the planning premises. It has already been indicated that the managers cannot take it easy after they have formulated a business forecast. They have to constantly compare the actual operations with the forecasts prepared in order to find out the reasons for any deviations from forecasts. This helps in making more realistic forecasts for future. Having determined the deviations of the actual performances from the positions forecast by the managers, it will be necessary to examine the procedures adopted for the purpose so that improvements can be made in the method of forecasting.
There are various methods of forecasting. However, no method can be suggested as universally applicable. In fact, most of the forecasts are done by combining various methods.
Under this method, forecast in regard to a particular situation is based on some analogous conditions elsewhere in the past. The economic situation of a country can be predicted by making comparison with the advanced countries at a particular stage through which the country is presently passing. Similarly, it has been observed that if anything is invented in some part of the world, this is adopted in other countries after a gap of a certain time.
Thus, based on analogy, a general forecast can be made about the nature of events in the economic system of the country. It is often suggested that social analogies have helped in indicating the trends of changes in the norms of business behaviour in terms of life. Likewise, changes in the norms of business behaviour in terms of attitude of the workers against inequality, find similarities in various countries at various stages of the history of industrial growth.
Thus, this method gives a broad indication about the future events of general nature. Surveys can be conducted to gather information on the intentions of the concerned people. For example, information may be collected through surveys about the probable expenditure of consumers on various items. Both quantitative and qualitative information may be collected by this method.
On the basis of such surveys, demand for various products can be projected. Survey method is suitable for forecasting demand—both of existing and new products. To limit the cost and time, the survey may be restricted to a sample from the prospective consumers. Opinion poll is conducted to assess the opinion of the experienced persons and experts in the particular field whose views carry a lot of weight. For example, opinion polls are very popular to predict the outcome of elections in many countries including India.
Similarly, an opinion poll of the sales representatives, wholesalers or marketing experts may be helpful in formulating demand projections. If opinion polls give widely divergent views, the experts may be called for discussion and explanation of why they are holding a particular view.
They may be asked to comment on the views of the others, to revise their views in the context of the opposite views, and consensus may emerge. Then, it becomes the estimate of future events. A barometer is used to measure the atmospheric pressure. In the same way, index numbers are used to measure the state of an economy between two or more periods.
These index numbers are the device to study the trends, seasonal fluctuations, cyclical movements, and irregular fluctuations. These index numbers, when used in combination with one another, provide indications as to the direction in which the economy is proceeding.
Thus, with the business activity index numbers, it becomes easy to forecast the future course of action. However, it should be kept in mind that business barometers have their own limitations and they are not sure road to success.
All types of business do not follow the general trend but different index numbers have to be prepared for different activities, etc. Time series analysis involves decomposition of historical series into its various components, viz. When the various components of a time series are separated, the variation of a particular situation, the subject under study, can be known over the period of time and projection can be made about the future.
A trend can be known over the period of time which may be true for the future also. However, time series analysis should be used as a basis for forecasting when data are available for a long period of time and tendencies disclosed by the trend and seasonal factors are fairly clear and stable. Regression analysis is meant to disclose the relative movements of two or more inter-related series. It is used to estimate the changes in one variable as a result of specified changes in other variable or variables.
In economic and business situations, a number of factors affect a business activity simultaneously. Regression analysis helps in isolating the effects of such factors to a great extent.
For example, if we know that there is a positive relationship between advertising expenditure and volume of sales or between sales and profit, it is possible to have estimate of the sales on the basis of advertising, or of the profit on the basis of projected sales, provided other things remain the same.
According to this method, a forecast of output is based on given input if relationship between input and output is known. Similarly, input requirement can be forecast on the basis of final output with a given input-output relationship. For example, coal requirement of the country can be predicted on the basis of its usage rate in various sectors like industry, transport, household, etc. This technique yields sector-wise forecasts and is extensively used in forecasting business events as the data required for its application are easily obtained.
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