What is Forecasting? Predict Your Business Success with This Method

Forecasting is a term that is closely related to activities in the business world. The forecasting method is very necessary in planning and determining the products that will be made by a company so that the quality and quantity are correct. 

It can be said that forecasting is a method for planning and controlling production to deal with uncertainty in the future, especially to predict future product demand. It could also be when there are religious celebrations or other certain moments. 

Functions and Benefits

In general, as a business person, you certainly already understand the functions and benefits of this forecasting method . The function of forecasting is as a guide to determine the direction of company policies and decisions which are expected to be more effective and efficient in the future. From this function, the following benefits will arise: 

  • Maintaining the company’s financial stability, 
  • As a study of company policies that apply at present, in the past, and to what extent their influence will be in the future, 
  • In order to deal with anomalies or changes and something that could be different from the past and future, 
  • There is a time gap between policy and its implementation,
  • Providing the best solution if one day you face a problem related to business. 
  • Companies thus have a reference for determining policies in line with company goals. 

Types of Forecasting

Before discussing forecasting methods and their effectiveness, here are the types of forecasting.

1. Based on Time 

Time-based  forecasting methods are divided into 3, namely:

  • Long term: using analysis over a longer period of time. Usually lasts for more than 2 years. 
  • Medium term: carried out more quickly, namely 3 months to 2 years. 
  • Short term: carried out for a shorter period of time, starting from 0-3 months. 

2. Based on Function and Purpose 

The following is a classification of forecasting based on its function and purpose: 

  • General Business Forecasting: overall business forecasting starting from economic, political, social, cultural and other macro aspects. 
  • Sales Forecasting: forecasting the number of goods that can be sold in the future based on previous sales data.
  • Demand Forecasting: forecasting which aims to determine demand estimates and market conditions.
  • Financial Forecasting: also known as capital forecasting. Aims to estimate costs and capital incurred in the future. 

3. Based on Data Availability

As you understand, forecasting is an activity that will take place in the future based on data from the past. However, not all businesses have adequate data availability. In fact, the data needed determines how forecasting can be done. Forecasting activities are carried out based on data availability, as follows: 

1. Qualitative Method

The company or organization does not have sufficient data for analysis. The prediction results will be very subjective because the analysis results vary. Activities carried out can be through investigations, interviews, and/or discussions. Usually this method is used by start-up businesses or companies experiencing changes and transitions in their business. There are several qualitative methods that are most commonly used, namely: 

  • Delphi method: a group of experts from various backgrounds gather to provide opinions systematically. Usually use surveys or questionnaires. 
  • Market Research: uses research samples that end with a hypothesis. This is done by conducting surveys, stakeholders, or investigations of practitioners and even competitors. 
  • Consensus: have an open discussion. This method is often used with other methods such as market research and/or historical analogies because they are less effective and have been abandoned/no longer used by many companies. 
  • Historical Analogy: a method that compares life-cycle patterns or products to be analyzed. This method will be effective if the forecasting time is carried out in the medium and long term. 
  • Personal Insight: carried out by discussing and looking at references from people who are experienced and experts in their field. This can be done through journals, articles, interviews, mentoring, etc. which serve as a reference for forecasting. 

2. Quantitative Method

Companies that have sufficient data should use quantitative methods. The analysis process with this method uses a data and numbers approach. There are 2 quantitative methods used, namely: 

  • Time Series Method: uses analysis between the variable to be predicted and the time variable.
  • Causal Method: uses a cause-and-effect approach. This is done by connecting past data using independent variables. This method is used if a variable is influenced by another variable at a relevant forecasting time horizon. In the clause method, there are 3 approaches, namely: Regression and correlation; Econometrics; and Input-Output Model. 

Forecasting and Tax

Can forecasting also be implemented for taxes? Can. Usually, forecasting is done on tax revenues. Several methods can be applied in forecasting tax revenues. 

As already understood, forecasting will be a guide in planning budgets or predicting future income and business strategies. The analysis carried out in forecasting is useful in estimating what will actually happen in a certain period in the future.

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