Business Forecasting

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Business Forecasting
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What is forecasting?

• Forecasting is the process of using past events
  to make systematic predictions about future
  outcomes or trends.

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Forecasting

• It is the prediction of future events on the
  basis of
• Historical data
• Opinions
• Trend events
• Or known future variables

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Questions

• What is the significance of forecasting?
• What is the most important use of forecasting?

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What is business forecasting?

• Business forecasting is an estimate or
  prediction of future developments in business
  such as sales, expenditures, and profits
  .(usually are made by past events)

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Why do we need Business forecasting

• Reduces the cost
• Reduces the investment risk
• know about the market (have a general idea of
  market )
• reduce the problem of decision
• change the strategies of company in time

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The managers role in managing forecasts

• Who will take the responsibilty of forecasting?
• In small organization
• One with comprehensive knowledge
• In larger organizations
• User department
• Management services
• Data processing unit

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Data processing unit
Most popular

• Advantages technical expertise
• Disadvantages little knowledge of the overall
  issues, unable to serve for decision making

Probably the worst
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Management service

• Advantages
• Link between specialists and decisions.
• Feasible at board level.
• Disadvantage
• Remote from decision making.

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The user department

• Advantage
• The best to link specialists and decisions
• Disadvantage
• Insufficient technical expertise

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Forecasting as

• A team activity
• Who will be included in the team?
• What are the roles of each team member?
• What role is the most important in the
  forecasting system?
• View forecasting as a system

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The Main Forecasting Techniques

• Qualitative
• Causal modeling
• Time series methods

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Qualitative

• Based on judgment
• the use of subjective opinions to predict
• used when data is scarce and/or environment is
  complex and dynamic

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Qualitative techniques

• Expert opinions
• Group discussion

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Causal modeling

• It means that the variable to be forecast is
  related statistically to another variable which
  are thought to cause changes in it .

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Time series methods

• It predicts future values of a variable solely
  from historical values of itself.
• Time series methods are also usually the
  cheapest and easiest to apply.

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Sales Forecasting-

• Research about the future

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Sales forecasting

• Definition
• the process of predicting sales totals over some
  specific future period of time.

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The importance

• For operational planning
• Finance Dept. in
• Manufacturing Dept. in
• Purchasing Dept. in
• Human Resources Dept. in
• For the control function
• Establishing an evaluation standard.

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The benefits

• Increased revenue
• Increased customer retention
• Decreased costs
• Increased efficiency

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Forecasting methodologies

• Break-down forecasting
• GDP industry forecast a company
  forecast a product forecast

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Forecasting methodologies

• Build-up forecasting
• E.g. sales force composites industry survey
  potential customers sales forecast

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The Three levels of Forecasting

• Market potential
• the upper limit of industry demand, or the
  expected sales volume for all brands of a
  particular product type during a given period.
• The markets ability to absorb a type of product.

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The Three Levels of Forecasting

• Sales potential
• An estimate of an individual companys maximum
  share of the market, during a given period.
• A companys maximum market share

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The Three levels of Forecasting

• Sales forecast
• The expected actual sales volume
• What are the relations between the three levels?

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The relation of three levels (in the same given
period)

• Market PotentialgtSales PotentialgtThe Sales
  Forecast
• Market Potential industry demand
• Sales Potential companys demand
• The Sales Forecastactual sales volume

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Conditional forecasting

• The forecast will be accurate only if the
  assumptions are accurate.
• Three variants
• Optimistic assumptions
• Pessimistic assumptions
• The most likely assumptions

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Forecast by Time periods

• To project the behavior of a variable into
  future
• Short-term forecast a year or less
• Long-term forecast five to ten years
• Intermediate term
• Which is more accurate?
• The farther into the future you project, the
  greater your uncertainty.

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Forecasting options

• Executive opinion
• convenient, inexpensive
• Not scientific, subjective
• Sales force composite
• More expertise
• subjective, unaware of larger economic
  development, lower the demand deliberately

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Forecasting options

• Survey of customers
• Small costs, good for established products
• Not applicable with new products
• Projection of trends
• Working in mature markets data available
• Not for dynamically changing market

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Forecasting options

• Analysis of market factors
• Based on factors and market index
• Correlation methods regression methods
• No easy access to data

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Words of the End

• The best advice for using forecasts might
  include the following
• 1 Use multiple forecasts and perhaps average
• their predictions.
• 2 Remember that accuracy decreases the
  farther into the future you are trying to
  predict.
• 3 Use simple forecast (rather than
  complicated ones) where possible.
• 4 Important events often are surprises and
  represent a departure from predictions.

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Questions

• If a forecast is too optimistic , cash is often
  tied up in slow-moving inventory, and profit
  margins are reduced due to wasted overhead.
• What can we do to increase the accuracy of
  forecasting?

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• A chemical company wants to estimate the demand
  for sulfur next year. One use of sulfur is in
  manufacturing sulfuric acid. Another use of
  sulfur is in polishing new cars. GM is a customer
  of this chemical company. How could the chemical
  company determine how GMs new-car production
  next year might affect its sulfur sales?

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Types of Sales Forecasts
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Two types

• Macro Forecast
• Micro Forecast

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Macro Forecast

• World forecast
• Regional forecast
• National economic forecast
• Industry forecast

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Macro Forecast

• World forecast
• Importance
• Providing a valuable tool for long-range
  strategic planning by identifying long-term
  growth situations
• Examples of the thing forecast
• population, energy food production

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Macro Forecast

• Regional forecast
• Disadvantage lack of reliable data for the less
  developed areas
• Examples of the thing forecast
• the population of one Latin American country

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Macro Forecast

• National Economic Forecast
• Examples of the thing forecast
• gross national product, national income
• Business cycle

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Macro Forecast

• Industry forecast
• Examples of the thing forecast
• company sales

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Micro Forecast

• Company Sales Forecasts
• Product Sales Forecast
• Market Sales Forecast
• Territorial Sales Forecast

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Micro Forecast

• Company Sales Forecast
• It is the composite of all the firms product
  sales forecast.

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Micro Forecast

• Product Sales Forecast
• It represents the level of planned sales activity
  for a particular product during the planning
  horizon.

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Micro Forecast

• Market Sales Forecasts
• They are used where the same product is marketed
  to different types of users or situations.

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Micro Forecast

• Territorial Sales Forecasts
• They are used in the setting of territory sales
  quotas.
• What are quotas?
• Quotas are the levels of expected sales
  performance in a given sales persons territory.

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The sales forecast must be qualified by asking
the following questions

• What are the items to be forecasted (individual
  product lines or business units)?
• How far in the future should the forecast extend?
  
• How frequently should the forecast be made?
• How frequently should the forecast be reviewed?
• What would constitute an acceptable tolerance of
  forecast error?

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What are the external factors that can affect
sales?

• Seasonality of the business
• Relative state of the economy
• Direct and indirect competition
• Political events
• Styles or fashions
• Consumer earnings
• Population changes
• Weather
• Productivity changes

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What are the internal factors that can affect
sales?

• Labor problems
• Credit policy changes
• Sales motivation plans
• Inventory shortages
• Working capital shortage
• Price changes
• Change in distribution method
• Production capability shortage
• New product lines