A ‘forecast’ is a prediction of what is going to happen as a result of a

given set of circumstances. The dictionary meaning of ‘forecast’ is

‘prediction, provision against future, calculation of probable events,
foresight, provision’. In business sense it is defined as ‘the
calculation of probable events’. When estimates of future conditions
are made on a systematic basis the process is referred to as
forecasting and the figure or statement obtained is known as a
‘forecast’.
Business forecasting refers to the tools and techniques used to
predict developments in business, such as sales, expenditures, and
profits. The purpose of business forecasting is to develop better
strategies based on these informed predictions. Past data is
collected and analyzed via quantitative or qualitative models so that
patterns can be identified and can direct demand planning,
financial operations, future production, and marketing operations.
The growing competition, rapidity of change in circumstances and
the trend towards automation demand that decisions in business
are not to be based purely on guess work rather on careful analysis
of data concerning the future course of events. Forecasting aims at
reducing the areas of uncertainty that surround management
decision making with respect to costs, profit, sales, production,
pricing, capital investment and so forth.

Forecasts are predictions (or estimates) of any change in economic

phenomena which may affect business plans.’ [Mc Farland]

‘Forecasting refers to the statistical analysis of the past and current

movements so as to obtain clues about the future pattern of
movement.’ [Neter and Wasserman]
 Characteristics

i. Concerned with future events – Forecasting is concerned with

future events. It is a systematic effort to peep into the future. It is
essentially a technique of anticipation.
ii. Necessary for planning process – Forecasting is necessary for the
planning process. It is the basis for planning. Decisions cannot be
taken without the help of forecasting. Therefore, it is an integral
part of the planning process.
iii. Consideration of relevant facts – Forecasting considers all
factors which affect organizational functions. It is a technique to
find out the economic, social, and financial factors affecting the
business.
iv. Inference from known facts – Forecasting is a systematic attempt
to probe the future by inference from known facts. It is an analysis
of past and present movements so as to arrive at the conclusion
about the future pattern.
v. Art of reading the future – Forecasting is not an exact science. It
involves looking ahead and projecting the future events. It requires
the use of scientific, mathematical, and statistical techniques for
reading the future course of events.
vi. Elements of guess-work – Forecasting involves elements of
guess-work. Personal observations help in guessing future events to
a great extent. Estimates for the future are based on the analysis of
past and present circumstances.
 Significance/Importance

i. Essence of planning – Planning cannot be done without

forecasting. Forecasts are the premises (or basic assumptions) upon
which planning and decision-making are based. Planning without
forecasting is impossible.
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ii. Exactness in decision-making – Forecasting brings exactness and

accuracy in managerial decisions. It improves the quality and
validity of management decisions. It enables a manager to probe the
future economic, social, and political factors that might influence
his decisions.
iii. Implementation of project – Forecasting enables the
entrepreneur to achieve success. It helps the entrepreneur to gain
experience and implement a project on the basis of his experience.
iv. Contribution to business success – The success of a business
depends on the accurate forecasts made by the various
departments. It helps to identify and face environmental challenges
with determination. Risks and uncertainties can be reduced to a
great extent with the help of forecasting. It contributes greatly to the
success of the business by warning business against trade cycles.
v. Developing coordination – Forecasting brings about coordination
in the efforts of the subordinates. It helps to collect information
about internal and external factors and brings unity in the plans. It
creates team spirit in the organization. It helps to integrate various
plans so that a unified overall plan can be developed.
vi. Facilitating control – Forecasting helps in achieving effective
control by providing relevant future information to the
management in advance. The management can be aware of its
strengths and weaknesses through forecasting. It discloses areas
where adequate control is necessary for the efficient and effective
operations of the enterprise. It helps in revealing the weak spots in
the organization and thereby improves performance.
vii. Smooth working of an organization – Forecasting ensures
smooth and continuous working of an organization. The business
can be saved from the adverse impact of trade cycles through
accurate forecasting of sales for the concerned period. It helps the
organization to estimate expected profits on the basis of forecasted
revenues and costs.
viii. Development of a business – The development of a business is
fully based on forecasting. It helps the promoter to assess the
feasibility of establishing a new business by considering expected
benefits, costs, risks, and uncertainties of the proposed business.
The success of business depends on sound forecasting. Forecasting
is of utmost importance in setting up of a new business.

Process

The process of business forecasting involves the following

steps:
Step # 1. Understanding the Problem:
The first step in the forecasting process is the understanding of real
problem about which forecasts are to be made. A manager must
know clearly the purpose of forecasting. Forecasts may be made in
regard to technological conditions, sales, choice of people,
availability of finance and so forth. The clear understanding of the
scope of forecasting will help the manager to probe the relevant
information only.
Step # 2. Developing the Groundwork:
In this stage, the manager will try to understand what changes in
the past have occurred. He can use the past data on performance to
get a speedometer reading of the current rate (say of sales or
production) and how fast this rate in increasing or decreasing. This
will help in analysing the causes of changes in the past.
Step # 3. Selecting and Analysing Data:
There is a definite relationship between the choice of statistical facts
and figures and the determination of why business fluctuations have
occurred. Statistical data cannot be selected intelligently unless
there is proper understanding of the business fluctuations. The
reasons of business fluctuations will help in choosing the relevant
information. After selecting the data, they are analysed in the light
of past changes. Statistical tools can be used to analyse the data.
Step # 4. Estimating Future Events:
Future events are estimated on the basis of analysis of past data.
Here, the manager must use his past experience and judgement. He
must know clearly what he expects in the future in the light of
overall organisational objectives. He should make an estimate of
future business from a number of probable trends revealed by the
systematic analysis of data. The estimated results can be compared
with actual results in the future. This will help in refining the
process of forecasting.

The following are the factors which affect a business

forecasting to a greater extent:
(A) Internal Factors:
These factors are related to the internal structure of the business
which may further be divided into the following major factors. The
factors enumerated below are those factors which arise out of the
nature and size of the business and which affect the forecasting to a
greater extent as compared to those which are categorized as
external factors.
The broad divisions are:
(1) Past statistics relating to the business;
(2) Data in respect of –
(a) Cost of materials;
(b) Wage rates;
(c) Cost of Capital;
(d) Capital requirements; etc.
(3) Financial resources;
(4) Future expansion plans;
(5) Plans for product development;
(6) Future business requirement, etc.
(B) External Factors:
These factors are related to those factors which are not directly
connected with the nature and size of the business and over which
the management of the business has either little or no control.
These are those factors over which no one in the business has a
worthwhile control. Instead one has to swim or sink with the
external factors.
These factors have been divided under the following sub-
factors:
(1) Political Stability:
If the nation is practically stable the business flourishes. Thing
outside the business remain static and stable. Generalisation come
true and so the forecasts.
(2) Government Restrictions:
Today Government all over the world are interfering more and more
in business activities through various restrictions and control. If
these are announced on long-term basis forecasting becomes easy
and if they are for a short period forecasting is rendered difficult.
(3) Fiscal and Monetary Policy:
The fiscal and monetary policy affects the business activity. The
rigidity or flexibility of the policies do not affect the forecasting if
once it is known to the business world that the state will pursue a
rigid or flexible policy. But frequency of changes in the policy does
affect the forecasting. From forecasting point of view a flexible but
less frequency changing fiscal and monetary policy is regarded as
good.
(4) Population:
On population depends demand forecasting. The statistics on
population is collected by the government which is usually used for
the purpose of business forecasting.
(5) Statistics on Employment Productivity and National
Income:
Their availability source and reliability to help in forecasting and
affect its process.
(6) Price Level and Trend:
Frequent and wild changes in price levels do adversely affect the
forecasting. On the contrary stable price trends help in achieving
the objectives of forecasting.
(7) Technological research and development.
(8) Export potentialities.
(9) General business environment.

Business Forecasting – Need

The need of business forecasting cannot be over emphasised. It
provides valuable service to the business world. The business today
is competitive which need not only constantly review the current
policies, priorities and programmes but it also needs a perfect
forecast about the future so that future policies and programmes of
the business may be finalised today and action may be taken in the
finalised future policies and programmes.
The following are important reasons for which forecasting
becomes a necessity:
(i) To estimate all business activity,
(ii) To execute the plans of the business effectively,
(iii) To determine the managerial activities and help the
management in effectively managing the affairs of the enterprise,
(iv) To estimate and ascertain the nature and span of control,
(v) To establish better and effective co-ordination,
(vi) To help the business growth in desired direction,
(vii) To help in achieving the objectives of the business enterprise.

The following are the limitations of forecasting:

i. Based on assumptions – Forecasting is made on the basis of
certain assumptions and human judgements. Faulty assumptions
and human judgements will yield wrong results.
ii. Uncertainty of the future – Forecasting helps to know the future.
It is a prediction of future events. But there is uncertainty of
occurrence of such events. Forecasting cannot eliminate the margin
of errors and the possibility of mistakes.
iii. Lack of skill of experts – Forecasting is more of an art than a
science. Its success largely depends on how skillfully it is put into
practice. It requires a high degree of skill. But in practice, very few
experts are available for forecasting.
iv. Lack of reliable information – Proper forecasting needs adequate
and reliable information. It is very difficult to collect reliable data
and information. Hence, it is not possible to forecast correctly due
to lack of reliable information.
v. Far from absolute truth – Forecasting is not an accurate science.
There is no fool-proof method of predicting the future. In reality^
forecasts are seldom recognized as true, due to a high degree of
uncertainty of the future.
vi. Time and cost factors – Forecasting involves collection of
information and conversion of qualitative data into quantitative
data. This involves a lot of time and money. Therefore, forecasting is
both expensive and time-consuming.
vii. Ever-changing business conditions – Business conditions are
dynamic and ever-changing. They can never be forecast accurately.
Forecasting does not specify any concrete relationship between past
and future events.

Business Forecasting – Suggestions for Making Forecasting

Process More Effective
Following may be the important suggestions for making
the process of Business forecasting more effective:
(1) Proper collection of required data- Required data must be
collected properly and from reliable sources before making the
forecasting because the reliable data is the real base of effective
forecasting.
(2) Detailed analysis of data collected- Data collected must be
analysed in detail so that the line of action may be decided and final
decision be taken.
(3) Forecasting must be a continuous process- Forecasting should
be adopted as a continuous process and not as a function. It must be
a continuous process.
(4) Forecast must be flexible- There must be sense of flexibility in
forecasting process. Therefore forecast must be flexible so that
necessary changes may be made in forecasts. Rigid forecasts may
fail in the changed circumstances.
(5) Forecasts must be for short term- Forecast must be made for
short term. Forecast made for long period cannot be successful
because the circumstances and the situations may change in the
long run.
(6) Assumptions be adopted carefully- Assumptions are must for
forecasts but the assumptions must be adopted after a careful study
of the reliability and feasibility of assumptions.
(7) For the success of forecasts, the managerial co-operation is
essential- The cooperation of all levels of management especially the
managerial co-operation is essential and it must be obtained and
the opinions of all persons concerned with the forecasts must be
collected.
(8) Forecasts must be impartial- Forecasts should not be partial.
Every best effort must be made to take it sure that the forecasts are
not only the opinions of the persons making forecasts.
(9) Scientific approach- Forecasts must be made based on scientific
techniques and methods. Only the guess and the estimates cannot
be effective forecast.
(10) Forecasts must be in accordance with the circumstances-
Forecasts must be based on careful study and analysis of the past
incident. In addition to this, present situations and circumstances of
the business enterprise also should be taken into account very well.
(11) Person forecasting must be experienced, efficient and possess
perfect knowledge of the subject- Person who has not got knowledge
of the situation and is not an experienced man and efficient, he will
not be able to make forecasting in perfect and scientific manner.

In the end it can be said that forecasting in business is essential and

on the basis of this the producer produces goods. Therefore, success
in business entirely depends upon perfect and well-judged
forecasting.