LIMINATIONS OF FORECASTING

Firm makes forecasting to design production schedule, arrangement of raw materials and labor, capital expansion plan, investment and inventory policy and plant expansion or contraction plan etc. but forecasts are rarely cent percent correct. The reasons behind this are:
? The underlying phenomenon does not have in a manner that warrants the use of information from the past and present to obtain reliable cent percent correct future. ? The phenomena might behave according to some set pattern but economic science does not have the necessary tools to discover them.
? There is lack of actual data and there by hinders the reliable prediction.
? Economic relationships are not as easily deducible as in the natural sciences.
Economic forecasts are approximations or mere generalizations. They have to be modified in accordance of changing situations. The forecast of the economic events are made on the assumption that these events have some continuity for future. That is forecasting for future can be used to reduce uncertainty for tomorrow by the help of present and past information’s. Thus, the main aim of forecasting is to reduce uncertainty about tomorrow by expectation that value of forecast will lie near the truth. The real test of forecast are higher than the costs involved. But there are some limitations of the demand forecasting due to which forecast may go in wrong direction.
Use of Techniques: The degree of accuracy of the forecasting depends on the techniques used. The forecast is made on the assumption’ that there are definite relationships between certain variables such as income, price, advertising and sales. The wrong assumptions may result the forecasting errors. Forecast errors may appear because
? There is possibility of change in the relationships established on the basis of past data.
? Possibility of not following the established relationship in the future as in the past.
? Some variables like government expenditure, profit in previous year are the exogenous and lie outside the system and are unpredictable.
Economic Error: The economic error occurs out of the formulation of an inappropriate relationship between variables, because the economic relationship between the variables depends on the situation of the time of formulating relationships. These relationships are usually influenced by may such economic and political factors.
Measurability of Phenomenon: Another error may occur due to measurability of phenomenon. For example, there are many variables, which affect forecasts such as fashion, attitudes of consumers, weather etc., which are difficult to measure and collect.
Statistical Error: Statistical error also affects the accuracy of forecasting. Statistical error occurs due to the reasons, like- negligence of the persons who compile data, defective sample, unrepresentative sample size etc. The degree of accuracy can be increased but it leads higher costs and attention, which may be not profitable for the firm in view of time and resources.
Durability of Goods: The forecast of durable goods maybe less accurate because there are very little replacement demand for such goods. In the long run sudden incidence such as war, wide depression and prosperity, technological discovery, invention, development may occur.
To conclude, there may be error, uncertainties and differences in forecasting. But the importance of forecasting for the modern business enterprises is unavoidable. The forecasting plays a crucial role in the development of business activities. Therefore, efforts should be made to obtain better results from the scientific way of forecasting.