Techniques in Management Forecasting

Predicting the business environment of the future is a key management function. You have to forecast what your business situation will look like at a specific time to be able to plan effectively. Forecasting lets you hire the people you will need, make sure adequate financing is available and ensure your level of production is enough to meet the projected demand. To forecast your company's situation accurately, you have to use one of several relevant techniques.

You should use qualitative techniques when relevant and reliable numerical data is not available. This may be because you are trying something new or because the existing situation has changed radically. Qualitative techniques rely on quality advice from informed people familiar with your situation. These could be experts in the field or your own employees who are familiar with the markets or business situation. Brainstorming and exploring scenarios are qualitative techniques that result in options and choices. A team-based approach to qualitative decision-making can build consensus and arrive at a valid forecast and resulting course of action.

When you have data, a quantitative technique based on time series can give reliable forecasts. Time series forecasting uses historical data to develop a matching series over a given time. If sales of a product decreased over the summer but peaked at Christmas every year for the past 5 years, then you can forecast the same behavior for next year. If total sales increased steadily by 5 percent per year over the last 10 years, you can forecast that they will increase 5 percent per year over the next 3 years. Time series forecasting gives specific answers but needs consistent data trends.

Causation also examines past data but looks for a cause and effect relationship. Such a technique predicts an increase in Christmas sales based on the increased demand due to the holiday season and possibly because of sales featuring low prices. If the technique can filter out the effect of low prices, it can forecast how much of a sales increase you can expect from lowering your prices at other times of the year. Causation is a powerful technique if you can identify the cause and effect relationship.

Simulating your business situation mathematically is an effective quantitative technique. It relies on a mathematical model based on past data. If you can establish a mathematical relationship between past data sets, you can use the mathematical formula for forecasting future behavior. Past data may show that decreasing the price by 5 percent results in an 8 percent sales increase. Placing such data in a mathematical model can allow you to predict the sales increase resulting from a 12 percent price drop.