1.

What is forecasting

A planning tool that helps management in its attempts to cope with the uncertainty of the future,
relying mainly on data from the past and present and analysis of trends.

Forecasting starts with certain assumptions based on the management's experience, knowledge, and
judgment. These estimates are projected into the coming months or years using one or more techniques
such as Box-Jenkins models, Delphi method, exponential smoothing, moving averages, regression
analysis, and trend projection. Since any error in the assumptions will result in a similar or magnified
error in forecasting, the technique of sensitivity analysis is used which assigns a range of values to the
uncertain factors (variables).

A forecast should not be confused with a budget. See also back casting.

2. Different types of forecast

Data to Track

Any approach to forecasting requires market research to establish demographic information. The first
step is to determine the competition, the market area, how many people live there and how the
population is likely to change. Regional and county zoning and planning commissions can provide
information on growth trends, and the Chamber of Commerce can help identify the competition. The
next step is identifying potential buyers and how likely they are to buy from you. Their loyalty to the
competition is an intangible, but it's necessary to estimate because the conversion rate for switch overs
must be factored into your revenue stream. Any information you can gather about competitors sales
can be the basis for an initial sales forecast. As a startup, one cannot count on more than 50 percent of a
comparably-sized competitor's sales volume during the initial months.

Forecast Methods

The sales funnel is a useful tool for forecasting sales. Beginning with the number of potential customers
in a designated territory, the field is narrowed by estimating in succession those who have been
contacted, met with a salesperson, indicated an interest, received a quote and agreed to buy. What you
track depends on your business. Sales per square foot of shop space, customers per table or numbers of
physical products sold are all components of an overall sales projection. Tracking time-of-day and
seasonal sales rounds out the minimal information you need to gather. When a firm is established and
has a good pool of data, forecasting can be more refined.

Statistical Forecasting
Statistical forecasting encompasses a wide range of techniques and can be worked manually or with
desktop spreadsheet programs. Simply plotting trends by hand is a good way to start a projection. An
alternative approach is to look for correlations between variables such as sales and different price
points. Comparing year-to-year growth allows one to forecast trends, while taking seasonal fluctuations
into account. Moving averages are effective tools for factoring out random fluctuations within trends.

Potential Pitfalls

Being overly optimistic is a bias shared by many but one that must be monitored. Everyone who starts a
business has high hopes, but you must recognize that things can go amiss. A forecast must include
contingency plans. Any forecast must include an allowance for bad debt. Forecasting cash flow is
important, particularly if the firm offers extended payment terms. Those terms may put sales on the
books, but there must also be adequate cash generated from sales to fund day-to-day operations.

3. What are the different forecasting approaches

Two Distinct Approaches to Forecasting

Qualitative Methods

Used when situation is vague & little data exist

New products
New technology
Involves intuition, experience
ex., Forecasting sales to a new market

Quantitative Methods

Used when situation is stable & historical data exist

Existing products
Current technology
Heavy use of mathematical techniques
ex., Forecasting sales of a mature products