business & economic forecasting

7/30/2019 Business & Economic Forecasting

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Welcome to this Session

on

Business and Economic

Forecasting:Objectives and TechniquesMd. Alamgir

BIBM.


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Business Forecasting

The growing competition, rapidity of change inbusiness activities and the trend towardsautomation demand that decisions in business arenot based purely on guesses rather on a carefulanalysis of data concerning the future course of

events.More time, effort and attention should be given to

the future than to the past, and the question 'whatis likely to happen ?' should take precedence over'what has happened ?' though no attempt toanswer the first can be made without the facts andfigures being available to answer the second


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When estimates of future conditions are madeon a systematic basis, the process isreferred to as "forecasting" and the figure orstatement obtained is known as a "forecast".

Forecasting is a service whose purpose is tooffer the best available basis formanagement expectations of the future andto help management understand theimplications for the firm's future of thealternative courses of action to them atpresent.


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In a world where the future is not known withcertainty, virtually every business andeconomic decision rests upon a forecast offuture conditions.

In fact when a person assumes theresponsibility of running a business heautomatically takes the responsibility forattempting to forecast the future and to avery large extent his success or failurewould depend upon the ability to forecastsuccessfully the future course of events.


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Forecasting aims at reducing the area of uncertaintythat surrounds management decision-making withrespect to costs, profit, sales, production, pricing,capital investment, and so forth.

If the future were known with certainty, forecastingwould be unnecessary.

Decisions could be made and plans formulated on aonce-for-all basis, without the need for subsequentrevision.

But uncertainty does exist, future outcomes arerarely assured and, therefore, organized system offorecasting is necessary.


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Forecasting is concerned with two main tasks:First, the determination of the best basis availablefor the formation of Intelligent managerialexpectations; and

Second, the handling of uncertainty about thefuture, so that implication of decisions becomeexplicit.

Forecasting activity can be viewed as part of themanagement information system. It also impingeson the control system.


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Forecasts are commonly applied to capital investmentdecisions, strategic planning, product and marketplanning, production planning and stock control,budgetary control and financial planning andcompetitive position planning.

in fact, managers are forecasters and they areforecasting for much of their time.

They plan production in expectation of certain levels ofsales. They set prices in expectation of certain levelsof wages, raw material costs, financial constraints andsales.

They build warehouses in expectation of certain levels ofstocks and sales. They recruit labour, buy materials,

arrange finance, or plan factories in expectation ofcertain levels of sales and other activity.


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Objectives of Forecasting

The following are the main objectives of forecasting:

(1) The creation of plans of action. It is impossible toevolve a, worthwhile system of business controlwithout one acceptable system of forecasting.

(2) The second general use of forecasting is to befound in monitoring the continuing progress ofplans based on forecasts. Forecasts serve thefunction of lighthouses to shipmasters at night

(3) The forecast provides a warning system of thecritical factors to be monitored regularly becausethey might drastically affect the performance ofthe plan.


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Steps in Forecasting

Broadly speaking, the business forecasting consistsof the following steps:

(1)Understanding why changes in the past haveoccurred.

(2)Determining which phases of business activitymust be measured.

(3)Selecting and compiling data to be used as

measuring devices.(4)Analysis of data.


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Requirements of a Good Forecasting System

A forecasting system to be instrumental in contributing

to better management decision-making shouldsatisfy the following conditions:(1) It must involve the managers whose decisions are

affected.

(2) The forecasts must not claim too much validity orauthority.

(3) Implications of the various-probable errors in thepredictions for the organizations need to bethoroughly worked out so that management can

evaluate the consequences of the probable range oflikely outcomes.

(4) Management must at least know how badly thingscould go Wrong if all the guesses turned out wrong.


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Techniques of Forecasting

There is nothing new about business

forecasting. For centuries businessmenhave tried to adjust themseves in such amanner as to make the best out of thefuture conditions.

The rule-of-thumb method has been widelypractised in business. It consists ofdeciding about the future in terms of pastexperience familiarity with the problem athand. Even today this method is verywidely used in business.

But, it can lead to absurd conclusions ifemployed by the inexperienced.


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In recent years the techniques of forecastinghave improved to a marked degree and areapplicable to almost every sphere ofbusiness activity. Attempts are being madeto make forecasting as scientific as

possible.To handle increasing variety of managerial

forecasting problems, many forecastingtechniques have been developed in recent

years. Each has its special use, and caremust be taken to select the correcttechnique for particular application.


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Before applying a method of forecasting, thefollowing questions should be answered:

(1) What is the purpose of the forecast-how

is it to be used ?(2) What are the dynamics and components ofthe system for which the forecast will bemade?

(3) How important is the past in estimatingthe future?


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The following are some of the important

techniques of forecasting:1. Historical Analogy Method

2. Field Surveys and Opinion Poll

3. Business Barometers

4. Extrapolation5. Regression Analysis,

6. Econometric Models

7. Lead-Lag Analysis8. Exponential Smoothing

9. Input-output or end-use Analysis

10.Time Series Analysis


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Organization and its goals

Basically, an organization is a group of people

intentionally organized to achieve an overall,common goal or set of goals.

Business organizations can range in size from

two people to tens of thousands.There are several important aspects to

consider about the goal of the business

organization.


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Organization of business in modern times can

assume the following forms:sole proprietorship, individual entrepreneur or

one-man business,

partnership,

joint-stock companies,

cooperative enterprises and

State enterprises.


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INDIVIDUAL ENTREPRENEUR

The organiser of the 'one-man concern invests his owncapital and may also borrow some. He rents a shop

and hires the service of an assistant, if necessary.

He himself makes purchases and personally

attends to the sales. He is his own manager. Heinitiates, organises, directs all economic activity

and takes the entire risks. Thus, the sole proprietor

combines in his person the functions of capital,

enterprise and even labour in many cases. Here the

usual goal is to maximize the profit.


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PARTNERSHIP

Limitations of the one-man business give rise toanother form of business organisation,

called partnership. Two, three or more

people combine, contribute capital, andagree to share profits and bear losses in

agreed proportions.

Here also the usual goal is to maximize theprofit.


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JOINT-STOCK COMPANY

The joint-stock company is undoubtedly themost important type of business organisation

today. It seeks to remedy the disabilities and

the handicaps of the partnership arising outof small financial resources and limited

business talent.

Here also the usual goal is to maximize theprofit.


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JOINT-STOCK COMPANY

The company business is generally a large-scalebusiness. Therefore, it enjoys all the economies oflarge-scale production, internal and external, e.g.,economies arising from the use of specialized labor

and machinery, economy of space, of buying andselling, publicity, research or experiments, etc.

The management is democratic, efficient and

economical. The directors are elected by the

shareholders. They are supposed to be persons withwider vision, outstanding administrative abil i ty and

business acumen. Their expert advice and guidance

are available to the company at a very moderate cost


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CO-OPERATIVE ENTERPRISE

Cooperatives are voluntary organisations,open

to all persons able to use their services

and willingto accept the responsibilitiesof membership, without gender, social,

racial, political or religious

discrimination.


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CO-OPERATIVE ENTERPRISE

Producers' Co-operationConsumers' Co-operation: There is another type of co-

operation which has a long record of success. I t is

Consumers' Cooperation. The arrangement is that

the consumers of a locality contribute capital insmall shares and start 1 store of their own. The co-

operative store buys goods from wholesalers like

other dealers, and sel ls these goods to their members

at the ordinary market rates. Profi ts are distr ibutedamong the members in proportion to their purchases

or, what is more common, in proportion to the share

capital. Generally, share capital is equally

contr ibuted and profi ts are, therefore, also equally

divided among members.


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STATE ENTERPRISE

In every country, there are many publicundertakings run by Governments or local

bodies. Postal and telegraph arrangements

are generally under the Government; andpublic utility services like water supply, gas,

electric supply,or tram or bus services are

managed by municipal corporations.


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STATE ENTERPRISE

The organisation of State enterprise is on the same lines asprivate enterprise with the usual structure of general

manager, foremen, works manager, accountants, treasurer,

departmental heads, and so on. The work is done generally

in the same manner as in a joint-stock company.

But there is a fundamental difference. All the employees are

government servants with fixed tenure and prospect of

getting a pension on retirement. The capital is provided

from the State coffers, which comes ultimately from the tax-

payers. Profit is secondary in government-owned

corporations. Their main objective is to ensure that a

particular service is available to citizens.The profits, if any,

too, go to the State.


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Goal of Public Enterprise in Under-developedCountries

In under-developed countries, public enterprises are badlyneeded to initiate and accelerate the developmental process.They can promote social and economic development in thefollowing ways.

(i) By Creating Social and Economic Entities. State can provideeducational facilities and technical training, medical aidand public health measures and develop irrigation andmeans of transportall which is indispensable foreconomic growth.

(ii) By Building Basic Heavy Industries. It isbeyond privateenterprise to develop basic heavy industries like iron andsteel, heavy electrical and heavy engineering industries. Butthese are essential for providing a base for industrial

development.


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Goal of Public Enterprise in Under-developed

Countries(iii) By Optimum Allocation of Resources.

Private enterprise is notorious for misallocation of the country's

resources lured by profit motive. Public enterprise, which is

guided by social gain rather than private profit, is needed,to correct this tendency and help in bringing about an

optimum allocation of resources.

(iv) Ensuring Balanced Regional Growth. State, as a guardian of

people's welfare, takes special pains to develop backwardregions. For this purpose, industrial units are deliberately

located in backward areas. In this way, regional balanced

development is brought about.


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Goal of Public Enterprise in Under-developed

Countries(v) Utilising Surplus Labour for Capital Formation. The public

enterprises favourably located can drain out from the rural

areas surplus labour in the form of disguised

unemployment and use it more productively. This willpromote economic development.

(vi) Creating Investible Surplus. The profits of public

enterprises are a good source of finance for economic

development.

(vii) Planning Made Effective. If economic plan, ning relied on

private enterprise, it would be very ineffective. Hence

public enterprise is needed to make it effective.

business & economic forecasting

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