Theories of business forecasting

Theories of Business Forecasting

In the old time business forecasting were done only on the basis of experiences and assumptions. But in present time this work is done on the basis of scientific methods.
The business forecasting is based mainly on the following points :

(1) Action and Reaction theory: This theory is based on Newton’s third law of motion of physical sciences. According to this theory, “To every action there is always an equal and opposite reaction.” According to this theory of physical science we see opposite reaction for every activity in business field also. If any variation occurs in business field there must be its reaction also. Thus we can predict
business forecasting by keeping in mind action and reaction. This forecasting is based on scientific logics and therefore conclusions are near to the truth.For example, if the price of T.V. increases upto a normal level then its production is also increased later. Due to it,its supply also increases. Consequently its price will decrease. The determination of this normal level is a very tough task in such type of forecasting. This normal level does not
remain constant. It is dynamic.

(2) Time Lag or sequence theory: According to this theory business variations do not occur simultaneously but successively in a definite sequence. In other words various business variations occur one by one respectively. That is we can tell that an event takes some time to have its effect.
For example, if Reynold pen company spends some money on the advertisement of its pen then an increase in pen’s sale will be certainly seen after sometime.

(3) Cross-cut analysis theory: People say that History repeats itself but this theory is opposite to it. According to this theory, History never repeats itself. That is, the events which have occurred, in past history, not necessarily repeat. All depend on present condition. Business forecasting is done by the study of present. Past conditions are not taken into account.

(4) Economic Rhythm theory: Followers of this theory assume that economic phenomenon behave in a rhythmic order. Here business forecasting is based on the analysis of time-series. This theory is useful to estimate secular trend.

(5) Specific Historical Analogy theory: Followers of this theory assume that History repeats again and again. Past period resembles the present as far as possible. This principle is suitable in the trade cycles.

Methods of Forecasting

From the concept of business forecasting it has been cleared that for business forecasting there should be sufficient informations of past and present variations occurring in all types of data relating to business. Forecasting should not be based only on guess but it should be based on statistical analysis. Various scientific methods of forecasting have been developed in modern statistics. Following are the main
scientific methods of business forecasting:

1.Business Barometer: Business index numbers are to be constructed for the study and analysis of various activities of business cycle. These index numbers are called business barometers. These predict the business fluctuations in the same way as the barometers predict the weather.Actually, these are the outer tools, giving information of variations taking place in outer world, which introduce the businessman with activities of greater level. Index numbers of national income, agricultural production, wholesale price, industrial production etc. may help to businessman too much in forecasting the production, sale, cost,profit-loss etc.Various problems like business-extension, money investment, market-development etc. may be solved properly but business barometers also have some limitations. It has all those demerits which are found in conclusion and use of index numbers.

2) Extrapolation: It is the simplest method of business forecasting. It is also useful in various conditions. It is a mathematical method. Any price of future may be forecasted by this method. The price, thus obtained, is the most probable value of an item so perfect accuracy can’t be expected through it. Though the accuracy of this method depends upon the fact that the knowledge about the fluctuation in data and the important events affecting the data to the investigator is upto what extent. The methods of extrapolation may be divided mainly in two categories:


(i)Graphic method
(ii) Algebraic method

(i) Graphic method: Graphic method is the simplest method extrapolation. In this method independent variable (like time or class limits) are plotted on X-axis and dependent variable on Y-axis. Joining the points so obtained by free hand a curve will be available. Studying the fluctuation and movement of this curve, it is produced according to prepattern. After that we draw a perpendicular line from a point on the X-axis for which time unknown value is to be determined and from the point where this line cuts the curve we draw a perpendicular on Y-axis. The point where this line cut Y-axis indicates the unknown value.

(ii) Algebraic method: Following are the algebraic method for extrapolation.

(a) Binomial expansion method Newton’s method of advancing difference method Lagrange’s method Business forecasting for future may be done by using anyone of the above methods. Calculation by these
methods may be little difficult.

(3) Trend projection method: We know that the natural tendency of variation with time is found in economic and business fields. Hence forecasting for future may be done

Demand Forecasting

Forecasting of the demand or sale of commodity for certain future time is said to be demand forecasting. In other words, under future sale planning of a firm, predicting the probable demand or sale for a certain period of future is called demand forecasting,

According to Cendiff and Still, “Sales forecasting is an estimate of sales during a specified future period which estimate is tied to a proposed marketing plan and which assumes a particular set of uncontrollable and competitive forces

According to William Lazer, “Sales forecasting is the focus of integrative planning.

According to Philip Kolter, “The company forecast is the expected level of company sales based on a chosen marketing plan and assumed marketing environment.

From the above definitions we can say that estimating the quantity of total sale or price of a commodity for a future period by using statistical methods and informations is called demand forecasting.

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