What are the steps in conducting an effective forecast?

 

Forecasting refers to the practice of predicting what will happen in the future by taking into consideration events in the past and in the present. It is a decision-making tool that helps businesses in coping with the impact of the future's uncertainty by examining historical data and trends. Therefore, it is a planning tool that enables businesses to chart their next moves and create budgets that will hopefully cover whatever uncertainties may occur in the future. The following are the features of forecasting:

• Forecasting is made by analyzing the past and present factors which are relevant for the functioning of an organization.
• The analysis of various factors may require the use of statistical and mathematical tools and techniques.
• Forecasting relates to the future events.
• Forecasting helps in the planning process because it reveals the future course of action.
• It defines the probability of happening of future events.

Forecasting helps the managers in the following ways:

•  Basis of Planning. Forecasting provides the knowledge of planning within which the managers are able to analyze their strengths and weaknesses and can take appropriate actions in advance before actually they are put out of market. Forecasting also provides the knowledge about the nature of future conditions.

• Success in Organization. Even though forecasting cannot check the future happenings, it can provide clues and indicates when the alternative actions should be taken. Managers can therefore, save their business and face the unfortunate happenings if they know in advance what is going to happen in the future.

• Forecasting indirectly provides the way for effective co-ordination and control. It provides interactive opportunities for better unity and co-ordination in the planning process. Forecasting can also provide relevant information for exercising control. The managers can know their weaknesses in the forecasting process and they can take suitable action to overcome them.

Step-by-step explanation

Below are the steps in conducting an effective forecast;

1. Develop the basis of forecasting.

The first step in the process is developing the basis of the investigation of the company's condition and being able to identify where the business is currently positioned in the market.

2. Estimation of future operations of the business.

On the basis of the data collected through systematic investigation into the economy and industry situation, the manager is supposed to prepare quantitative estimates of the future scale of business operations, while taking into account the planning premises.

3. Regulation of the forecast.

This involves looking at the different forecasts in the past and comparing them with the actual things that happened with the business. The differences in previous results and current forecasts are analyzed, and the reasons for the deviations are then considered. This helps in making more realistic forecasts for future.

4. Review of the forecasting process.

Having determined the deviations of the actual performances from the positions forecast by the managers, it will be necessary to examine the procedures that should be adopted for the purpose so that improvements can be made in the method of forecasting.