If only we were able to predict the future, we’d all be rich. Well, that fantasy is played out every day in boardrooms across the globe with the practice of business forecasting.
Organizations don’t fly by the seat of their pants: they’re constantly working on forecasting the future. Every decision, each process they engage in, has been based on some manner of forecasting to support it. Companies focus their energies on ways to predict outcomes in order to help them set successful long-term strategies.
Some forecasts are based on highly sophisticated statistical methods; some are based on experience and examine past precedent, while others just follow a gut feeling. One thing is constant, all industries rely on business forecasting.
It goes without saying that the more accurate business forecasting is, the more effective the strategies and project plans that stem from the process. Therefore, it’s important to thoroughly understand business forecasting in order to give your organization a competitive advantage.
What Is Business Forecasting?
Business forecasting is a method to predict the future, where the future is narrowly defined by economic conditions. It combines information gathered from past circumstances with an accurate picture of the present economy to predict future conditions for a business.
It refers to techniques such as taking a prospective view of how the economy is likely to turn out in the short-term. Its use is critical for businesses whenever the future is uncertain. The more they can focus on the probable outcome, the more success the organization has as it moves forward.
Business Forecasting Methods
There are many ways to approach business forecasting. For example, there are both qualitative and quantitative methods. Some of the more common forecasting models are outlined below.
Qualitative forecasting is based on the opinion and judgement of consumers and experts. This business forecasting method is useful if you have insufficient historical data to make any statistically relevant conclusions. In such cases, an expert can help piece together the known bits of data you do have, to try to make a qualitative prediction from that known information.
Qualitative business forecasting is also useful for when little is known about the future in your industry. Relying on historical data is useless if that data is not relevant to the uncharted future you are approaching. This can be the case in innovative industries, or if there’s a new constraint entering the market that has never occurred before, such as a new tax law.
Quantitative forecasting is applicable when there is accurate past data available to predict the probability of future events. This method pulls patterns from the data that allow for more probable outcomes. The data used in quantitative forecasting can include in-house data, such as sales numbers, and professionally gathered data, such as census statistics. Generally, quantitative forecasting seeks to connect different variables in order to establish cause and effect relationships that can be exploited to the benefit of the business.
The Average Approach
The average approach says that the predictions of all future values are equal to the mean of the past data. Past data is required to use this method, so it can be considered a type of quantitative forecasting. This approach is often used when you need to predict unknown values, as it allows you to make calculations based on past averages, where one assumes that the future will closely resemble the past.
The Naïve Approach
The naïve approach is the most cost-effective and is often used as a benchmark to compare against more sophisticated methods. It is only used for time series data, where forecasts are made that are equal to the last observed value. This approach is useful in industries and sectors where past patterns are unlikely to be reproduced in the future. In such cases, the most recent observed value may prove to be the most informative.
Elements of Business Forecasting
- Develop the Basis: Before you can start forecasting, you must develop a system to investigate the current economic situation around you. That includes your industry and its present position, as well as its popular products to better estimate sales and general business operations.
- Estimating Future Business Operations: Now comes the estimation of future conditions, such as the course that future events are likely to take in your industry. Again, this is based on collected data to help with quantitative estimates for the scale of operations in the future.
- Regulating Forecasts: Whatever your forecast is, it must be compared to actual results. This is the only way to find deviations from the norm. Then the reasons for those deviations must be figured out, so action can be taken to correct those deviations in the future.
- Reviewing Forecasting Process: By reviewing the deviations between forecasts and actual performance data, improvements are made in the process, allowing you to refine and review the information for accuracy.
Sources of Data for Forecasting
Your forecast will only be as good as the data you put into it. So, first, before collecting data, ask yourself these questions:
- Why collect data?
- What kind of data?
- When to collect it?
- Where to collect it?
- Who will collect it?
- How will it be collected?
These are the questions that will shape your plan for the collection of data, which is crucial to business forecasting. Once you have your plan, data can be collected from a variety of sources.
Primary sources contain first-hand data, often collected with reporting tools. These are ones that you or the person assigned this task collect personally. If primary data is not available, then you must go out and source it yourself through interviews, questionnaires or observations.
Secondary sources contain published data or data that has been collected by others. This includes official reports from governments, publications, financial statements from banks or other financial institutions, annual reports of companies, journals, newspapers, magazines and other periodicals.
Business Forecasting Only Goes So Far
If business forecasting was a crystal ball, then everyone would be reaping the rewards of their insightful foresight. While business forecasting is a tool to get a better view of what the future might have in store, there is the argument that it’s wasting valuable time and resources on little return.
It’s true, you can follow the steps, use a variety of methodologies, and still get it wrong. It is, after all, the future. There’s no way to ever manage all the variables that can impact future events. There are errors in calculations and the innate prejudices of the people managing the process, all of which add to the unpredictability of the results.
Yes, you’re not going to have a clear, unobscured vision of the future by using business forecasting, but any insight into probable future trends is going to put you and your organization at an advantage. Even a small step can be a great leap forward in the highly competitive world of business. By combining statistical and econometric models with experience, skill and objectivity, business forecasting is a formidable tool for any organization looking for a competitive advantage.
ProjectManager.com can’t predict the future, but it does provide you with the tools you need to take advantage of business forecasting. Our cloud-based project management software collects data in real-time, and stores past data, allowing you to filter information and pull up the metrics you need to make the right decision. Try it today with this free 30-day trial.