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Business forecasting

With the rapidity of change in circumstances, the growing competition and the trend towards automation demand that decisions in business are not based purely on guesses and hunches rather on a careful analysis of data concerning the future course of events. More time and attention is given to the future than to the past and the question what is likely to happen? Takes precedence over what has happened? though no attempt to answer the first can be taken without the facts and figures being available to answer the second.

When estimates of future conditions are made on a systematic basis the process is referred to as forecasting and the figure or statement obtained is known as a forecast in a worked where the future is not known with certainty virtually every business and economic decision rests upon a forecast of future conditions. In fact, when a man assumes the responsibility of running a business, he automatically takes the responsibility for attempting to forecast the future and to a very large extent; his success or failure would depend upon the ability to forecast successfully the future course of events. Forecasting aims at reducing the areas of uncertainty that surround management decision-making with respect to costs, profit, sales production, pricing, capital investment and so forth, if the future were known with certainty forecasting would be unnecessary decisions could be made and plans formulated on a once-and for -all basis without the need for subsequent revision. But uncertainty does exist, future necessary rather than the establishment of predictions that are based on hunches, intuition or guesses. In fact, a good manger is not so much one why can minimize the effect of past mistakes nut rather one who can successfully manage the future. The forecast may be wrong but they must be made.

The question is not forecast or no forecast? Instead it is what kind of forecast? It may be noted that the value of a forecast is not merely its accuracy but the fact that making it requires a balanced consideration of factors influencing future developments, right or wrong.

Role of forecasting in business

It should be realized at the outset that the object of business forecasting is not to determine a curve or series of figures that will tell edacity what will happen say a year in advance, but it is to make analysis based on definite statistical data. Which will enable and execute to take advantage of future conditions to a greater extent than the soled do without them? In many respects, the future tends to move like the past. This is a good thing, since without some element of continuity between past, present and future; there would be little possibility of successful prediction. By history is not likely to repeat itself and we would hardly expect economic conditions next year or over the next ten years to follow a clear-cut precedent. Yet frequently past patters prevail sufficiently to justify using the past as a basis for predicting the future.

While forecasting one should note that it is impossible to forecast the future precisely- there always must be some range of error allowed for in the forecast; statistical forecasts are those in which we can use the mathematical theory of probability of measure the risks of errors in predictions.

Some of its important topics are under:

1.       Introduction to business forecasting

2.       Cautions while using forecasting techniques

3.       Methods of forecasting

4.       Theories of business forecasting

Business forecasting

The growing competition, rapidity of change in circumstances and the trend towards automation demand that decisions in business are not based purely on guesses and hunches rather on a careful analysis of data concerning the future course of events. More time and attention is given to the future than to the past and the question "what is likely to happen? takes precedence over what has happened"? though no attempt to answer the first can be taken without the facts and figures being available to answer the second.

When estimates of future conditions are made on a systematic basis the process is referred to as forecasting and the figure or statement obtained is known as a forecast in a worked where the future is not known with certainty virtually every business and economic decision rests upon a forecast of future conditions. In fact, when a man assumes the responsibility of running a business, he automatically takes the responsibility for attempting to forecast the future and to a very large extent; his success or failure would depend upon the ability to forecast successfully the future course of events. Forecasting aims at reducing the areas of uncertainty that surround management decision-making with respect to costs, profit, sales production, pricing, capital investment and so forth, if the future were known with certainty forecasting would be unnecessary decisions could be made and plans formulated on a once-and for -all basis without the need for subsequent revision. But uncertainty does exist, future necessary rather than the establishment of predictions that are based on hunches, intuition or guesses. In fact, a good manger is not so much one why can minimize the effect of past mistakes nut rather one who can successfully manage the future. The forecast may be wrong but they must be made.

Role of forecasting in business

It should be realized at the outset that the object of business forecasting is not to determine a curve or series of figures that will tell edacity what will happen say a year in advance, but it is to make analysis based on definite statistical data. Which will enable and execute to take advantage of future conditions to a greater extent than the soled do without them? In many respects, the future tends to move like the past. This is a good thing, since without some element of continuity between past, present and future; there would be little possibility of successful prediction. By history is not likely to repeat itself and we would hardly expect economic conditions next year or over the next ten years to follow a clear-cut precedent. Yet frequently past patters prevail sufficiently to justify using the past as a basis for predicting the future.

While forecasting one should note that it is impossible to forecast the future precisely- there always must be some range of error allowed for in the forecast; statistical forecasts are those in which we can use the mathematical theory of probability of measure the risks of errors in predictions.

Steps in forecasting

Forecasting business change involves more than analysis of statistical data-it also embodies the prediction of economic change such as secular trend seasonal variations, cyclical variations and a consideration of cause and effect.

Broadly speaking, the forecasting of business fluctuations consists of the following steps:

  • Understanding why changes in the past have occurred one of the basic principles of statistical forecasting-indeed of all forecasting when historical data are available-is that the forecaster should use the data on past performance to het a speedometer reading of the current rate (say, of sales) and of how fast this rate is increasing or decreasing. The current rate and changes in the rate-acceleration and deceleration-constitute the basis of forecasting. Once they are known various mathematical techniques can develop projections from them. If an attempt is made to forecast business fluctuations without understanding why past changes have taken place. The forecast will be purely mechanical based solely upon the application of mathematical formulae and subject to serious error.
  • Determining which phases of business activity must be measured. After it is known why business fluctuations have occurred. Or if there is a reasonable supposition, it is necessary to measure certain phases of business activity in order to predict what change will probably follow the present level of activity.
  • Selecting and compiling data to be used as measuring devices. There is an interdependent relationship between the selection of statistical data and determination of why business fluctuations occur. Statistical data and cannot be collected and analysed in an intelligent manner unless there is a sufficient understanding of business fluctuations; likewise, it is important that reasons secure data that are related to the reasons.
  • Analysing the data. In this last step, the data are analysed in the light of one's understanding of the reason why change occurs. For example, if it is reasoned that a certain combination of forces will result in a given chine, the statistical part of the problem is to measure these forces and from the data available, to draw conclusions on the future course of action. The methods of drawing conclusions may be called forecasting techniques and they represent any one of a large number of a large number of analytical devices for summarizing data and sawing inferences form the summaries.

Theories of business forecasting

Several theories have been developed out of researches conducted by individuals and institutions on business forecasting important amongst these are:

  1. Sequence or time-lag theory;
  2. Action and reaction theory.
  3. Economic rhythm theory.
  4. Specific historical analogy.

Sequence or time-lag theory:- they is by the most important theory of business forecasting. It is based on the assumption that most of the business data have the lead relationship changes in business are successive and not simultaneous. There is time-lag between different movements, for example, expenditure on advertisement may not at once lead to increase in sales. Similarly, hen government makes use of deficit financing it leads to inflationary pressure-the purchasing power of people goes up-the wholesale prices. The retail prices start rising. With the rise in retell prices the cost of living goes up and with it there is a demand for increased wage. Thus, one factor, more money in circulation, has affected various fields of economic activity not simultaneously but successively, similarly, when the excise duties are increased by the government they result in increases in prices which would lead to higher demand for wages.

Action and reaction theory:- this theory is based on two assumptions (1) every action has a reaction and (2) magnitude of the original action influences the reaction. Thus if the price of wheat has gone up above a certain level in a certain period, there is likelihood that after some time it will go down below the normal level, thus, according to this theory a certain level of business activity is normal-sub normal or abnormal conditions cannot reaming so for ever- there is bound to be reaction to them. Thus, we find four phases of a business cycle:

  1. Prosperity
  2. Decline.
  3. Depression and
  4. Improvement.

Economic rhythm theory:- the basic assumption of this theory is that history repeats itself and hence the exponents of this theory believe that economic phenomena behave in a rhythmic order. Cycles of early the same intensity and duration tend to recur. Thus, the available historical data have to be analysed into their component parts and different types of fluctuations. Influencing them has to be segregated. A trend is then obtained which will represent a long-term tendency or growth of decline. This trend line is projected a number of years into the future either by the freehand method or by the mathematical method. This is done on the assumption that the trend line represents the normal growth or decline of the series.

Specific historical analogy:- this theory is hazed on a more realistic assumption, that all business cycles are not uniform in amplitude or duration and as such the use of history is made not by projecting any fancied economic rhythm into the future, but by selecting some specific previous situation which has many of the earmarks of the present and concluding that what happened in the previous situation will happen in the present one also. What is done is that a time series relating to the data in question is thoroughly scrutinized and from it such period is selected in which conditions were similar to those prevailing at the time of making the forecasts. The course which events tool in the past under similar circumstances is then studied which gives an idea of the likely course which the phenomenon in question would follow. For example, after world war many persons forecast a depression because world war. I had followed by a depression.

Cross-section analysis:- this theory is based on the knowledge and interpretation of current forces rather than projection of past trends. The theory assumes that no two cycles are alike. By the like causes always produce like results. All the factors bearing upon a given situation are assembled and relying upon the knowledge of economic processes. The forecaster concludes whether the situation is favorable or not, immediate recognition is given to the fact that business conditions are shaped by simultaneous inflationary and deflationary forces. Predominance of inflationary forces results in booms, whereas predominance of deflationary forces leads to depression. The forecaster who utilizes this method enumerates stable forces and a third which sets forth deflationary forces on the basis of judgment. Obviously, the dominant dories change from time to time; factors which need careful attention include technological development supply-demand relationship government policies and businessmen expectation. In regard to the latter, serial organisation regularly conduct survey of executive opinions concerning future trends of general business conditions and selected series of business data.

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