Modern management principles and practices

Forecast

The business world is uncertain and riddled with contentious variables. These variables often can influence a business in numerous ways resulting in new market dynamics. Though many of these variables are difficult to predict as they are to enumerate, businesses still attempt to do so. Through forecasting, businesses attempt to anticipate future changes in both business activity and competitive landscape. Forecasting, when used properly as a tool to supplement business decisions can be a vital aspect of an organization. It provides a strategic reference point in which to gauge performance and ultimately profitability. It also provides clarity as to the overall direction of a business.

To begin, a forecast is generally considered a planning tool that helps management in its attempts to cope with the uncertainty of the future. The data is many forecasts rely almost exclusively on data from the past and present to analyze future trends occurring in a business. Forecasting starts with certain assumptions based on the management's experience, knowledge, and judgment. This flexibility in regards to forecasting is also one of its main weaknesses. Unethical, misinformed or overzealous management could create unrealistic projections that undermine employee moral and investor confidence. This judgment factor used in forecasts should almost always be conservative in nature while also attempting to capture the economic reality prevailing in the overall business. Estimates should therefore reflect realistic observations that are not based on biases but on factual information relevant to the business. These estimates are projected into the coming months or years using one or more techniques such as exponential smoothing, moving averages, regression analysis, and trend projections. 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 or variables.

One very common sales forecasting technique is that regression analysis. In business, a regression analysis is a statistical technique for estimating the relationships among variables. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. In this instances, sales volume and hours worked can be plotted on a regression line. This allows managers to see a relationship between the two variables as it relates to sales volume. Depending on the result, or trend, managers are better able to forecast future sales growth (Freedman, 2005).

Another very common sales forecasting technique is that of trend projections. When numerical data are available, a trend can be plotted on graph paper to show changes through time. In this instance, sales volume growth can be depicted on the graph to show either a growing, or declining trend. If desired, the trend line can then be extended or "projected" into the future on the basis of the recent rate of change. This trend analysis will project on future sales growth using a historical average to better help managers determine future sales opportunity (Bianchi, 1999).