What is Forecasting? Meaning
Forecasting is a process of predicting or estimating the future based on past and present data. Forecasting provides information about the potential future events and their consequences for the organisation. It may not reduce the complications and uncertainty of the future. However, it increases the confidence of the management to make important decisions. Forecasting is the basis of premising. Forecasting uses many statistical techniques. Therefore, it is also called as Statistical Analysis.
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Features of Forecasting
Peculiarities, characteristics or features of forecasting are as follows:-
- Forecasting in concerned with future events.
- It shows the probability of happening of future events.
- It analysis past and present data.
- It uses statistical tools and techiques.
- It uses personal observations.
Steps in Forecasting
Procedure, stages or general steps involved in forecasting are given below:-
- Analysing and understanding the problem : The manager must first identify the real problem for which the forecast is to be made. This will help the manager to fix the scope of forecasting.
- Developing sound foundation : The management can develop a sound foundation, for the future after considering available information, experience, type of business, and the rate of development.
- Collecting and analysing data : Data collection is time consuming. Only relevant data must be kept. Many statistical tools can be used to analyse the data.
- Estimating future events : The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.
- Comparing results : The actual results are compared with the estimated results. If the actual results tally with the estimated results, there is nothing to worry. In case of any major difference between the actuals and the estimates, it is necessary to find out the reasons for poor performance.
- Follow up action : The forecasting process can be continuously improved and refined on the basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must be regular feedback on past forecasting.
Importance of Forecasting
Merits, significance or importance of forecasting involves following points:-
- Forecasting provides relevant and reliable information about the past and present events and the likely future events. This is necessary for sound planning.
- It gives confidence to the managers for making important decisions.
- It is the basis for making planning premises.
- It keeps managers active and alert to face the challenges of future events and the changes in the environment.
Limitations of Forecasting
Demerits, criticism or limitations of forecasting involves following points:-
- The collection and analysis of data about the past, present and future involves a lot of time and money. Therefore, managers have to balance the cost of forecasting with its benefits. Many small firms don't do forecasting because of the high cost.
- Forecasting can only estimate the future events. It cannot guarantee that these events will take place in the future. Long-term forecasts will be less accurate as compared to short-term forecast.
- Forecasting is based on certain assumptions. If these assumptions are wrong, the forecasting will be wrong. Forecasting is based on past events. However, history may not repeat itself at all times.
- Forecasting requires proper judgement and skills on the part of managers. Forecasts may go wrong due to bad judgement and skills on the part of some of the managers. Therefore, forecasts are subject to human error.