Business Forecasting: Definition, Need and How to Do it

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Pratibha Devasenapathy | Jan-13-2020

What is Business Forecasting?

Every business’ prime motive is to make profits. Revenue generation is the only way a business can retain its position in the market, and it can be achieved through careful planning, analysis and quick decision-making techniques. Business forecasting is a method to predict the future, where it is narrowly defined by economic conditions. It combines information gathered from past circumstances with an accurate picture of the present economy to predict future conditions for a business. To operate efficiently, businesses need a concrete plan on achieving both their long-term and short-term goals.

What is the need for Business Forecasting?

Business forecasting can help multiple functions for crucial decision making. Eg: Forecasts also help to understand customer engagement and therefore shape marketing efforts.

  • Since forecasts estimate an expected sales volume over a specified period of time, salespeople can use them to set their activity goals, and subsequent adjustments can be made to reach sales goals
  • Marketers can use forecasts to gauge the effectiveness of their campaigns, decide which markets to enter and exit, and determine the life cycle of their products
  • Senior managers and finance teams use forecasts to prepare and evaluate financial plans, capitalize on production, and assess needs and logistics. A forecast can help inform critical decisions on how to allocate resources and set overhead levels within a business: personnel, rent, utilities, and other overhead

Questions That Businesses Must Ask for Accurate Forecasting

Since forecasting is something that can be predicted based on the analysis and data fetched from past and current scenarios, assumptions become an obvious part of the process. However, to mitigate incorrect assumptions and be more accurate in your judgement about the future, you need to ask some relevant questions:

  • Changes to the market: How much will the market grow? What other competitors exist that might affect market share?
  • Customer behaviour: Get an idea of how many customers are gained and lost each year, whether there are certain periods of greater sales fluctuation (e.g., seasonality), and the average customer sales, along with their variance
  • Resources: Businesses also need to be aware of how much they may be required to grow and the limitations, as well as how much to spend in advertising and what is driving or hurting sales

Once you have found answers to these questions, it’s time to set up an accurate forecasting method, which is suitable for your business. There are primarily three general methods: Qualitative, Quantitative and Causal models.

Qualitative Approach

This method is generally used when a business/product/service is new. This technique gains its insights using expert opinions and well-informed judgements that are logical, systematic, and unbiased in their estimations, which are then quantified. As the name implies, they are not as rigorous generally as quantitative methods.

Quantitative Approach

This approach relies on historical or “time-series” data, so it is more often used when the product or service has been existing in the market since sometime. New businesses or businesses with new products might not be able to use this method. The forecast is analysed by recognising patterns, trends, and changes in the data using this mathematical technique.

Casual Modelling

Causal modelling, is considered as the most sophisticated of the three forecasting tools, identifies the relevant causal relationships. This process considers everything that influences sales, even employing some time series analysis, and restricts the number of assumptions. In case assumptions are made, they are monitored throughout the modelling to ensure their validity, and the model is constantly filtered as and when more information is available.

Post choosing the relevant forecasting method, the final step you should perform is checking the results of the approach you’ve taken to predict the state of your business. Verifying the model performance will help you draw conclusion of how well the methodology that you’ve applied to assess the future of your company is working out for you. Thus, you can then take actionable steps accordingly and plan to climb up the business ladder successfully.

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