Forecasting Techniques Business Decisions Require Accurate Forecasting

Forecasting Techniques

Business decisions require accurate forecasting which takes into account the possible trends and twists in the economy and the society. One of the earliest accounts of forecasting can be found in the Bible when Joseph interpreted dreams and told people there would be seven years of harvest followed by seven years of drought. With careful forecasting, the Pharaoh and his people could prepare themselves for the latter period of adversity. While business experts may no longer rely on dreams or even hunches, they still engage in consistent forecasting with the help of current data, models, forecasting methods and various popular theories. Forecasting is thus an important part of business planning since business decision makers are more interested in formulating policies and strategies that are based on accurate information of current and future trends instead of randomly coming up with ideas and measures for the future.

Past is usually seen as a good and reliable indicator of future trends which means that business decision makers need to understand what happened in the past and how it affected the future then in order to carry the wisdom gained through past experiences into the future. Economic theories, indexes, sales data, current trends, consumer preferences, and even political situation may all impact the market and for this reason businessmen rely on forecasting techniques which are broadly divided into the categories of time frame and qualitative/quantitative.

Time-frame techniques generally apply to a certain time period. They can be short-term, long-term and medium-term forecast which help a firm understand where it would be standing after the expiration of the given period. Long-term forecasting, for example, normally aids in formulating suitable strategies for production expansion/contraction, financing and launching of new products or services.

Qualitative techniques of forecasting are now most highly in demand. They are used when there is no quantitative data available and are based on years of experience and expertise. They require services of experts and when this is accomplished, the forecasts produced can serve as an important guide for short-term planning. Some of the primary qualitative forecasting methods include executive committee, the Delphi method, market research, surveys of the sales force and customers.

Executive committee refers to the method whereby a group of employees is selected for the task of creating forecasts. These employees would then rely on input from all parts of the firm and even from outside the organization to create the most accurate forecast. This is a common forecasting technique which is used for development, expansion and planning of products and services, whether new or existing. This method comes with one disadvantage i.e. The degree of consensus may not be known. When employees work as a team, some of them are likely to dominate the entire process and might have a stronger voice in depicting the results than others.

Delphi method is a branch of executive committee method but it is more indirect and structured which is likely to lead to better results since consensus would not be masked. "Based on theories of communication in group problem solving, Delphi techniques provide a structured process for eliciting and correlating informed opinions and information from a panel of experts on a topic of interest." (Burnette et al. 2003) In this case organization identifies few experts who can best handle a particular forecast and they are handed some structured questionnaires or specific tasks to respond to. These responses are then given to a coordinator who serves as a neutral party. The responses are then sent back to the respondents for review and analysis. Respondents are not identified so no one really knows whose views are being discussed or reviewed. This process may undergo more than one repetition until a consensus is reached. Use of electronic technology may help save time.