Steps in Demand Forecasting

The following steps are necessary to have an efficient forecast of demand.
Identification of objective: First step of demand forecasting is to identify and clearly state the objective of the forecasting. The objective of the forecasting may be short term or long term and it may be for market share forecasts or for industry as whole. So approach of demand forecasting may be different for different objectives.
Ascertaining the demand determinants and probable relationship with demand: Second step of demand forecasting is to ascertain the factor’s influencing he demand because factor’s influencing the demand may differ widely depending upon the nature of the product under consideration such as consumer’s durable goods, capital gods and consumer’s non durable goods. Once the factor’s influencing demand (variables) have been specified and the data gathered the next necessary step is to specify the form of the equation in which the independent variables are assumed to interact to determine the level of demand. The most common specification is a linear relationship such as:
Q = a + bp + ca + dy
Here, Q refers to the quality of a particular product demanded, p is the price charged, A refer advertising expenditures, and Y is per capita income. The quantity demanded is assumed to change linearly with changes in each of the independent variable for instance, it b = -2.0, demand will decline by 2 units for each 1 unit increase in the price of the product.
Selecting a proper method of forecasting: The selection of an appropriate method of forecasting is based upon the objective of the forecasting, type of data available, period for which the forecast is to be made, etc.
Interpretation of results and present the findings in a readable form: Mere preparation of forecasts does not lead the management anywhere. Interpretation of results is of equal importance. Management is interested only in the actual forecasts and their implication in practice. Interpretation of the results or findings should be presented in simple, clear and understandable manner. It is also equal importance to revise the forecasts in the light of changing circumstances constantly because forecasts are made on the assumptions of continuation of past events.