Question

Discuss the role of business forecasting. What do you think would be the major problems in forecasting a product's demand? Use an example to support your argument.

Answer 1

Business forecasting is an essential element in the operations of a business. In simple words, business forecasting is an attempt at predicting the future outcomes in a business on the basis of its past and present performance. Business forecasting helps in drawing a reasonable picture of the state of the business at a certain time in the future. Business forecasting often involves factors such as sales, revenue, growth rate, etc. Business forecasting helps a firm in budgeting, planning for the future, take appropriate actions to solve problems, make investment decisions, etc. For example, business forecasting helps Apple estimate the expected revenue from its products in the next quarter next two quarters or the next financial year. Such a forecast helps Apple in making investment decisions at present, plan for the future, make budgeting decisions, etc.

There are a number of challenges in business forecasting. Firstly, it is not easy to anticipate the future moves of the competitors. The performance of any business in the future significantly depends on the strategic moves of the competitors. For example, Apple's sales volume in the next financial year depends on how competitors such as Samsung would perform in the same period. Apple might not have accurate knowledge of Samsung' s plan for the next year, which might make forecasting very difficult. Secondly, the demand for a product depends on numerous factors, such as the state of the economy, expected inflation, interest rate, tax rate, tastes and preferences of consumers, etc. It is an overwhelming task to consider all these factors and forecast demand accurately. For example, an automobile firm needs to consider many factors such as movement in gasoline price, trade policies of the country, tax rate, expected inflation, etc, to estimate the demand for its automobiles in the future. Such an exercise can be inaccurate.