The increasing complexities of the business environment together with the changing demands and expectations, implies that every organization needs to know the future values of their key decision variables. In virtually every decision they make, executives today consider some kind of forecast. In any organization, managers play a significant role in implementing Forecasting techniques. Forecasting takes the historical data and project them into the future to predict the occurrence of uncertain events. Forecasting serves as a self-assessment tool for the company. To handle the increasing variety and complexity of managerial forecasting problems, many forecasting techniques have been developed in recent years. Each has its special use, and care must be taken to select the correct technique for a particular application.
The manager as the forecaster has a role to play in technique selection; and the better he understands the range of forecasting possibilities, the more likely it is that a company’s forecasting efforts will bear fruit. Sound predictions of demands and trends are no longer luxury items, but a necessity, if managers are to cope with seasonality, sudden changes in demand levels, and price-cutting maneuvers of the competition, strikes, and large swings of the economy. Forecasting can help them deal with these troubles; but it can help them more, the more they know about the general principles of forecasting, what it can and cannot do for them currently, and which techniques are suited to their needs of the moment.
The selection of a proper forecasting method depends on many factors. Some of such factors are; the context of the forecast, the relevance and availability of historical data, the degree of accuracy desirable, the time period to be forecast, the cost/ benefit (or value) of the forecast to the company, and the time available for making the analysis. These factors must be weighed constantly, and on a variety of levels. In general, for example, the forecasting manager should choose a proper forecasting technique that makes the best use of available data.
A manager forecasts by going through the reports, graphs and analyzes the pulse of the business. It can make a huge difference between just surviving and being highly successful in business. The future direction of the company may rest on the accuracy of forecasting done by a manager.
The forecasting methodology emphasis on the knowledge and judgment of the manager. This is unavoidable given the nature of the market, but it follows that developing a good forecast is a labor-intensive process.
When an objective is set in a company, the external and internal factors have to observed and listed by the manager. Studying cultural, political and international environment is necessary as these factors are uncontrollable. Internal factors such company’s internal policies and their effects on demand changes, technology changes, sales changes also need to considered. After gathering information various forecasting techniques which are needed are applied.
The forecast should be operationally applied. This can be done by breaking it down on the basis of number of product lines, the type of customers, the various management policies. The various scenarios derived earlier must be compared in light of the operational feasibility. The idea here is to determine what is feasible and what is profitable from total internal business environment. After studying various feasibilities the forecast becomes really useful. After using the forecast, the forecast errors and reasons for deviation are monitored regularly.
Managers who implement accurate sales forecasting processes realize important benefits to company such as:
- Ability to determine the expected return on investments
- The ability to plan for production and capacity
- Determine the value of a business above the value of its current assets
- Knowing when and how much to buy
- The ability to identify the pattern or trend of sales
- Enhanced cash flow
- In-depth knowledge of customers and the products they order.
Credit: Managerial Economics-MGU