Forecasting: Why is it required?
Forecasting in business is a very critical
activity done by organizations to predict future outcomes based on historical data
& the management views for budgeting, planning & estimation in order to
prepare the organization to achieve its goals & targets. It helps in determining
the success of the business & minimizing the role of “luck, chance, gut
feeling, etc.” in critical business decisions.
1. Promotion of business: Forecasting helps in the
promotion of business by anticipating the uncertainties and risks in the
business & taking appropriate measures. It also helps in estimating the demand
for products & services & how to increase the demand, how the
organization will face the competition, etc.
2. Efficient capital utilization: The capital requirements of a business depend entirely on sound
financial forecasting. Forecasting helps in estimating the financial requirements of a business
& efficient utilization of the capital by calculating the potential sales
& costs & forecast the funds required for other important things like expansion,
development etc.
3. Smooth running of business: Accurate forecasting helps the organizations know
their expected earnings to regulate their cash flow to meet their operational expenses
& other financial commitments.
4. Good decision making: The correctness of
management decisions related to utilization of resources for production, is heavily
dependent on accurate forecasting. It also helps the business to face adverse
conditions & unforeseen contingencies.
5. Success in business: Accurate sales forecasting helps in preparation
of plans of other depts in the organization like procurement of raw materials, financial
planning of working capital, manpower planning about how much people are
required, production planning about what & how much to produce, etc.
6. Plan Formulation: Forecasting is an essential element in
planning since planning premises include forecast data having enormous
implications. In fact, forecasting is done prior to planning in order to make
effective & robust business plans. Hence, forecasting and planning are
closely related & so is their success.
7. Co-Operation and co-ordination: Forecasting is a herculean
task that requires cooperation & coordination between all the depts in a
company. A crucial byproduct of forecasting is team spirit and coordination which
greatly improves the work culture in the organization.
8. Effective Control: Forecasting helps the
different depts. & their key decision makers about their weaknesses &
helps in implementing appropriate measures to overcome these weaknesses &
achieve better control they can overcome these weaknesses.