We know that planning is an important process in the management of any enterprise. It is the cornerstone of effective management. Forecasting is actually an integral part of the planning process. They both go hand in hand. Let us learn the meaning and advantages and limitations of forecasting.
What is Forecasting?
Forecasting is essentially a process of analyzing the past and present business movements and trends to obtain some idea or clues regarding future trends and business movements. Forecasting is looking into the future so that we can accordingly plan for it.
However, forecasting is not a haywire process. It is a systematic approach with well thought-out, scientific methods and procedures. It involves a thorough and proper analysis of data and facts with the help of both quantitative and qualitative techniques.
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Advantages of Forecasting
1] Assists in Planning
One of the biggest advantages of forecasting is that it enables the manager to plan for the future of the organization. Planning and forecasting actually go hand in hand. Without an idea of what the future hols for the company, we cannot plan for it. Thus, forecasting plays a very important role in planning.
2] Environmental Changes
When done correctly, forecasts should be able to point out the upcoming changes in the environment. This means that it can allow the company to benefit from such environmental changes. When the changes are favorable to the company it can expand and grow its business. And in conditions that are adverse, it can plan and prepare to protect itself.
3] Identifying Weak Spots
Another advantage of forecasting is that it will help the manager identify any weak spots, or ignored areas that the organization may have. Once attention has been drawn to these areas, the manager can put into effect effective controls and planning techniques to rectify them.
4] Improves Co-ordination and Control
Forecasting requires information and data from a lot of external and internal sources. This information is collected by the various managers and staff from various internal sources. So almost all units and verticals of the organization are involved in the process of forecasting. This allows for better communication and coordination amongst them.
Limitations of Forecasting
Along with the benefits, there are also some limitations of forecasting. Let us take a look at a few of them,
1] Just Estimates
The future will always be uncertain. Even if use the best of forecasting techniques and account for every aspect imaginable, a forecast is still just an estimate. One can never predict future events with 100% success. So even the best-laid plans may amount to nothing. This will always remain one of the biggest limitations of forecasting.
2] Based on Assumptions
The basis of any forecasting method is assumptions, approximations, normal conditions, etc. This makes these forecasts unreliable. So one must always keep in mind the inherent limitations of forecasting and be cautious in being over-reliant on them.
3] Time and Cost Factors
The data and information required to make formal forecasts are generally a lot. And the collection and tabulation of such data involve a lot of time and money. The conversion of qualitative data into quantitative data is also another factor. One must be careful that the time, money and effort spent forecasting must not outweigh the actual benefits from such forecasts.
Question on Limitations of Forecasting
Q: A forecast involves no guesswork at all. True or False?
Ans: The statement is False. While a forecast is done with meticulous scientific process and application of methods, it does involve some guesswork on the part of the manager.