Importance of Forecasting

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Importance of Forecasting

CFO Tech Outlook | Tuesday, July 26, 2022

Using information from the past and present, forecasters try to guess what will happen in the future.

FREMONT, CA: Forecasting is the practice of predicting what will occur in the future by analyzing past and present events. It is a planning tool that allows firms to map out their future steps and develop budgets that will hopefully account for unforeseen circumstances. Essentially, it is a tool for making decisions that help firms deal with the impact of future uncertainty by analyzing historical data and trends.

Budgeting and forecasting are strategies that help firms plan for the future, which is undeniably true. However, the two are dissimilar in numerous aspects. Consider the following details:

Budgeting entails the creation of a statement that includes a variety of a company's financial activities for a given period, including predicted revenue, expenses, cash flow, and investments. The budget guides the organization's economic actions. It is typically not conducted by a single department, such as the finance department, because a comprehensive and detailed report involves input from multiple departments. Consequently, the budgeting procedure is time-consuming.

In conclusion, budgets are dependent on forecasts. While annual budgets are the norm, weekly or quarterly updates are the norm for predictions. Through forecasting, a business can change its budget and provide extra funds to a department, if necessary, based on what is anticipated.

When businesses attempt to forecast what might occur in the future, they can select between qualitative and quantitative approaches.

Qualitative method: Qualitative forecasting, often known as the judging technique, yields subjective findings because it is based on the subjective opinions of experts or forecasters. Forecasts are frequently erroneous because they are based on the expert's knowledge, intuition, and experience rather than evidence, rendering the process nonmathematical.

One example is when a person predicts the outcome of an NBA championship game based on personal motivation and interest. This method's shortcoming is that it can be inaccurate.

Quantitative method: The quantitative approach to forecasting is a mathematical procedure, which makes it objective and consistent. It avoids basing its findings on opinion and intuition, instead relying on enormous amounts of evaluated facts and numbers.

Data Sources for Forecasting

Primary sources: It takes time to collect information from primary sources because it is first-hand information, regarded as the most dependable and trustworthy type. The forecaster conducts the collection using techniques such as interviews, questionnaires, and focus groups.

Secondary sources: Secondary sources provide information collected and published by other organizations. Industry reports are an example of this category of information. This information has already been collated and examined expedites the process.

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