FORECASTING

Concept and Purposes of Forecasting
Business or economic forecasting is necessary for forecasting the long-term demand for the firm’s product/products. Most business decisions are made in the face of risk or uncertainty. A firm must decide how much of each product to produce? What price to charge? And how much to spend on advertising? And it must also plan for the future growth of firm. All these decisions are based on some forecast of the level of future economic activity in general and demand the firm’s product(s) in particular. The aim of economic forecasting is to reduce the risk or uncertainty that the firm faces in its short-term decision-making and in planning for its long-term growth.
Forecasting the demand and sales of the firm’s product usually begins with macro-economic forecast of the general level of economic activity for the economy as whole because demand and sales of most goods and services are strongly affected by business conditions. For example, the demand and sales of new automobiles, new houses, electricity activity. The firm uses these macro forecasts of general economic activity as inputs for their micro forecasts of the industry’s and firms demand and sales. The firm’s demand and sale’s are usually forecast on the basis of its historical market share and its planned marketing strategy. From its general sales forecast, the firm can then forecast its sales by product line and region. Those, in turn, are used to forecast the firm’s operational needs for production (raw material, equipment, warehousing, workers), marketing (distribution network, sales force, proportional campaign), finances (cash flow) profits, need for and cost of outside financing, and personnel throughout the firm. The firm utilizes long-term forecasts for the economy and the industry expenditures on plant equipment to meet its long-term growth plan and strategy.
The purposes of forecasting differ according to types of forecasting. The purposes of short term and long-term forecasting can be out lined as follows:
Purposes of Short-Term Forecasting
Formulating an appropriate production policy: Future is uncertain so there is possibility of emergence of problems of overproduction or lack of sufficient supply of goods and services in the country due to mismatch between actual and estimated sales. Both situations are harmful to the firms. So, most of the producer’s have already realized the need of production schedules so as to avoid such problems of over production and short of supply. For this purpose, production schedule have to be geared to expected sales. Thus, one of the purpose of short-term forecasting is to formulate an appropriate production policy.
Deciding appropriate price policy: Appropriate price policy is required to avoid a price increase when the market conditions are expected to be weak and a reduction when the market is going to be strong.
Setting sales targets: If sales targets are set too high, they will be discouraging salesmen who fail to achieve targets. If sales targets are if set too low, the targets will be achieved easily and hence incentives will prove meaningless.
Forecasting the financial requirement: Financial requirement for a firm depends on sales level and production operations. Arrangement for funds in advance can hardly be done without knowing the volume of future production operation and sales. Therefore, sales forecast enable arrangement of sufficient funds on reasonable terms well in advance.
Reducing cost of purchasing raw materials and controlling inventory: The appropriate sales forecasts can reduce the costs of purchasing raw materials and controlling inventory by determining its future resource requirements.

Evolving a suitable advertising and promotional programme : Short-term forecasting helps management in finding suitable advertising and promotional programme and out lay so as to avoided wastage from them.