What is forecasting Why is it so important in the management

What is forecasting Why is it so important in the management of business firms and other enterprises What are the different types of forecasting How can the firm determine the most suitable forecasting method to use

Solution

1. (a). What is forecasting?

Forecasting is the use of historic data to determine the directions of future trends. It is so important to businesses because it is used to determine how to allocate their budgets for an upcoming period of time. It is typically based on demand for goods and services it offers, compared to the cost of producing them. Companies use forecasting to ascertain if events affecting them such as sales expectations will increase or decrease the price of their company shares. In the long-run, forecasting provides a benchmark for companies with operational perspectives.

A benchmark is nothing but a standard against which the performance of a security, mutual fund or investment can be measured. Setting a benchmark can assist an investor to communicate with the portfolio manager what they are hoping to achieve with their investment. It has to be set right for the investors goals. There are some economic indicators investors usually follow like Consumer Price Index (CPI), and Gross Domestic Product (GDP). Investors can use these indices to interpret current and future investment possibilities and judge the overall health of the economy. There is a strong correlation between economic growth in terms of GDP and corporate profit growth. Hence the importance of forecasting.

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