As we know, What is Forecasting? It may not reduce the complications and uncertainty of the future. Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be an estimation of some variable of interest at some specified future date. However, it increases the confidence of the management to make important decisions. Forecasting is the basis of promising. Forecasting uses many statistical techniques. So, what we discussing is – Understand the Advantages and Limitations of Forecasting.
The Concept of Business is explaining Forecasting for Company, in points of Advantages and Limitations or Disadvantages.
In this article, we will discuss Forecasting for Business Planning: First Advantages of Forecasting Methods, Advantages of Forecasting, after that Limitations of Forecasting, Basic Disadvantages of Forecasting, and finally discussing Steps in Forecasting. Usage can differ between areas of application: for example, in hydrology the terms “forecast” and “forecasting” are sometimes reserved for estimates of values at certain specific future times, while the term “prediction” is used for more general estimates, such as the number of times floods will occur over a long period.
Companies apply forecasting methods of production to anticipate potential issues and results for the business in the upcoming months and years. Forecasting methods can include both quantitative data and qualitative observations. Operations management techniques help businesses determine the actions they should take to bring about favorable results and avoid unprofitable scenarios based on those forecasts. These techniques frequently involve the development and distribution of both new and existing products and services.
#Advantages of Forecasting Methods:
Businesses employ a diverse array of forecasting methods to evaluate potential results stemming from their decisions. The most notable advantage of quantitative forecasting methods is that the projections rely on the strength of past data. The chief advantage of qualitative methods is that the main source of data derives from the experiences of qualified executives and employees. The vast majority of business owners blend hard data with personal impressions to develop useful forecasts.
#Advantages of Forecasting:
Forecasting plays a vital role in the process of modern management. It is an important and necessary aid to planning and planning is the backbone of effective operations.
Thus the importance or advantages of forecasting are stated below:
- It enables a company to commit its resources with the greatest assurance to profit over the long term.
- It facilitates the development of new products, by helping to identify future demand patterns.
- Forecasting by promoting the participation of the entire organization in this process provides opportunities for teamwork and brings about unity and coordination.
- The making of forecasts and their review by managers, compel thinking ahead, looking to the future and providing for it.
- Forecasting is an essential ingredient of planning and supplies vital facts and crucial information.
- Forecasting provides a way for effective coordination and control. Forecasting requires information about various external and internal factors. The information is collected from various internal sources. Thus, almost all units of the organization are involved in this process, which provides interactive opportunities for better unity and coordination in the planning process. Similarly, forecasting can provide relevant information for exercising control. The managers can know their weakness in the forecasting process and they can take suitable action to overcome these.
- A systematic attempt to probe the future by inference from known facts helps integrate all management planning so that unified overall plans can be developed into which divisional and departmental plans can mesh.
- The uncertainty of future events can be identified and overcomes by effective forecasting. Therefore, it will lead to success in the organization.
#Limitations of Forecasting:
The following limitations of forecasting are listed below:
The basis of Forecasting:
The most serious limitations of forecasting arise out of the basis used for making forecasts. Top executives should always bear in mind that the bases of forecasting are assumptions, approximations, and average conditions.
Management may become so concerned with the mechanism of the forecasting system that it fails to question its logic. This critical examination is not to discourage attempts at forecasting, but to sound caution about the practice of forecasting and its inherent limitations.
Reliability of Past Data:
The forecasting is made on the basis of past data and the current events. Although past events/data are analyzed as a guide to the future, a question is raised as to the accuracy as well as the usefulness of these recorded events.
Time and Cost Factor:
Time and cost factor is also an important aspect of forecasting. They suggest the degree to which an organization will go for formal forecasting. The information and data required for forecast may be in highly disorganized form; some may be in qualitative form.
The collection of information and conversion of qualitative data into quantitative ones involves a lot of time and money. Therefore, managers have to tradeoff between the cost involved in forecasting and resultant benefits. So forecasting should be made by eliminating the above limitations.
#Disadvantages of Forecasting:
The primary disadvantage of forecasting is the same as that of any other method of predicting the future: No one can be absolutely sure what the future holds. Any unforeseen factors can render a forecast useless, regardless of the quality of its data. Also, some forecasting methods may use the same data but deliver widely different forecasts. For instance, one forecasting method can show that interest rates will rise, while another will illustrate that rates will hold steady or decline.
#Steps of Forecasting:
Procedure, stages or general steps involved in forecasting are given below:
Analyzing and understanding the problem:
The manager must first identify the real problem for which the forecast is to be made. This will help the manager to fix the scope of forecasting.
Developing a sound foundation:
The management can develop a sound foundation, for the future after considering available information, experience, type of business, and the rate of development.
Collecting and analyzing data:
Data collection is time-consuming. Only relevant data must be kept. Many statistical tools can be used to analyze the data.
Estimating future events:
The future events are estimated by using trend analysis. Trend analysis makes provision for some errors.
The actual results are compared with the estimated results. If the actual results tally with the estimated results, there is nothing to worry. In case of any major difference between the actuals and the estimates, it is necessary to find out the reasons for poor performance.
Follow up action:
The forecasting process can be continuously improved and refined on the basis of past experience. Areas of weaknesses can be improved for the future forecasting. There must be regular feedback on past forecasting.
Above advantages and limitations, may be explained as you want to understating about Forecasting. Risk and uncertainty are central to forecasting and prediction; it is generally considered the good practice to indicate the degree of uncertainty attaching to forecasts. In any case, the data must be up to date in order for the forecast to be as accurate as possible. In some cases, the data used to predict the variable of interest is itself forecasted.