Types of Forecasts
Corporate planning groups use market forecasts to guide research and development activities and to plan new facilities. Finance and accounting groups use forecasts to estimate future profits and capital requirements. Marketing groups use forecasts to plan promotions and sales strategies. Operations groups use forecasts to plan plant capacity, inventory levels, production schedules, resource allocation, etc. And, investors use forecasts to identify under-priced securities. Clearly, forecasting is an essential part of business planning for most companies.
There is a wide variety of forecasting techniques that you can use including: qualitative techniques, such as combining department estimates; and, causal techniques, such as determining how advertising impacts sales and then deriving sales from planned advertising. This chapter deals exclusively with a third technique, time-series forecasting.
Time-series forecasting relies on the assumption that you can extract a trend or pattern from historical data, and extrapolate the trend into the future. For example, use historical sales to predict future sales. This is a very useful technique for short-range forecasts because it is easy to apply. Also, in the absence of any substantial change in business practices, time-series forecasts can be quite accurate.