Business Forecasting is an estimate or prediction of future developments in business such as sales, expenditures, and profits. Given the wide swings in economic activity and the drastic effects these fluctuations can have on profit margins, it is not surprising that business forecasting has emerged as one of the most important aspects of corporate planning. Forecasting has become an invaluable tool for business people to anticipate economic trends and prepare themselves either to benefit from or to counteract them. If, for instance, business people envision an economic downturn, they can cut back on their inventories, production quotas, and hiring. If, on the contrary, an economic boom seems probable, those same business people can take necessary measures to attain the maximum benefit from it. Good business forecasts can help business owners and managers adapt to a changing economy.
Some of the important needs of business forecasting are listed below:
1. Helps in Production Planning
The rate of producing the products must be matched with the demand which may be fluctuating over the time period in the future. Since its time consuming to change the rate of output of the production processes, so production manager needs medium range demand forecasts to enable them to arrange for the production capacities to meet the monthly demands which are varying.
2. Helps in Financial Planning
Sales forecasts are driving force in budgeting. Sales forecasts provide the timing of cash inflows and also provide a basis for budging the requirements of cash outflows for purchasing materials, payments to employees and to meet other expenses of power and utilize etc. Hence forecasting helps finance manager to prepare budgets taking into consideration the cash inflow and cash out flows.
3. Helps in Economic Planning
Forecasting helps in the study of macroeconomic variables like population, total income, employment, savings, investment, general price-level, public revenue, public expenditure, balance of trade, balance of payments and a host of other macro aspects at national or regional levels. The forecasts of these variables are generally for a long period of time ranging between one year to ten or twenty years ahead. Much would depend on the perspective of planning, longer the perspective longer would be period of forecasting. Such forecasts are often called as projections. These are helpful not only for planning and public policy making, they also include likely economic environment and aid formulation of business policies as well.
4. Helps in Workforce Scheduling
The forecast of monthly demand may further be broken down to weekly demands and the workforce may have to be adjusted to meet these weekly demands. Hence, forecasts are needed to enable managers to get tuned with the workforce changes to meet the weekly production demands.
5. Helps in Decisions Making
The goal of the forecaster is to provide information for decision making. The purpose is to reduce the range of uncertainty about the future. Businessmen make forecasts for the purpose of making profits. In business forecast has to be done at every stage. A business man may dislike statistics or statistical theories of forecasting, but he can not do without making forecasts. Business plans of production, sales and investment requires predictions regarding demand for the product, price at which the product can be soled and the availability of inputs. The forecast about demand is the most crucial. Operating budgets of various departments of a company have to be based upon the expected sales. Efficient production schedules, minimization of operating cost and investment in fixed assets is when accurate forecasts recording sales and availability of inputs are available.
6. Helps in Controlling Business Cycles
It is commonly believed that business cycles are always very harmful in their effects. Abrupt rise and fall in the price level injurious not only to businessmen, but to all types of persons, industries, trade, agriculture. All suffer from the painful effects of depression. Trade cycle increase the risk of business; create unemployment; induce speculation and discourage capital formation. Their effects are not confined to one country only. Business forecasting reduces the risk associated with business cycles. Prior knowledge of a phase of a trade cycle with its intensity and expected period of happening may help businessmen, industrialist, and economists to plan accordingly to reduce the harmful effects of trade cycle’s statistics is thus needed for the purpose of controlling the business-cycles.