Your childhood friend, Christine, plans to open an online boutique shop that specializes in Batik fashion for the international market. She intends to run the online business single-handedly and she casually commented that: "I can manage both the marketing, sales, and financial operations. It is a piece of cake!"

One year later, you bumped into her and you asked her how her business is doing. She said: "Very bad. I have difficulty fulfilling orders, at times I have excess stocks, and sometimes I run into shortages."

As someone trained in finance and international operations, take this opportunity to educate Christine on the role of forecasting in projecting a company's future income and expenses.

(Hint: You should discuss what forecasting is all about and the types of forecasting relevant to new ventures).

Forecasting is projecting the cash flows (CFs) and other assets and liabilities of the firm for proper maintenance of the resources. These projecting of CFs help in optimum utilization of resources.

Four types of forecasting that is 

• Straight Line (SL) - It uses simple growth rate and historical data in computing future results.
• Moving Average (MA) - It uses the average of the historical data in predicting a given variable.
• Simple Linear Regression (SLR) - It uses one independent variable (IV) in finding out dependent variables (DV) and requires statistical knowledge. 
• Multiple Linear Regression (MLR) - It uses two or more independent variables (IV) in finding out dependent variables (DV) and also requires observation and stats knowledge. 

Step-by-step explanation

Explanation:

Forecasting in business means predicting future results based on past events and future assumptions of any company's operations. Forecasting helps in boosting the efficiency of the business by proper planning. Forecasting gives a glimpse of future results based on past events and based on various assumptions. It helps in reducing the future complexities or uncertainties that the business may face. It is used in every unit of the business right from inventory management, human resource management, finance management, etc. 

There are four types of forecasting:

1. Straight Line (SL) - SL is the most simple forecasting method to picture future results. It used constant growth model assumption while forecasting results. There is no complexity in modeling cash flows (CFs) using these methods as the math used is very easy. Assumptions can be drawn using historical data.
2. Moving Average (MA) - MA is slightly more complicated than SL. It uses moving averages calculations for projections. It is easy in terms of computation and requires historical data. For example, Suppose we are using a 4-month model in forecasting revenues. Let's say to determine the revenue of April, we will take the average revenues of Jan, Feb, March, and April. In the same way for calculating May, we will take the average revenues of Feb, March, April, and May.
3. Simple Linear Regression (SLR)  - SLR uses two variables one is an independent variable (IV) other is a dependent variable (DV). IV is used to compute DV. For example, Let' say advertising is the IV and revenue is the DV. We can take the average cost incurred on advertising and the average revenue generated. Based on that we can compute revenue generated per cost incurred in advertising (in a dollar). This value can be used in calculating future revenue based on the amount  Which the business will spend on advertising. It requires the use of statistical knowledge and skills.
4. Multiple Linear Regression (MLR) - MLR is the most complicated model. It used more than two independent variables in determining the dependent variable. It requires excessive statistical skill and knowledge to use MLR. It is prone to model risk and is time-consuming.