What is business forecasting, and how can it improve performance?
Tempo Team
Every industry can be unpredictable. And it’s hard to establish sound business strategies and make decisions when you don’t know what’s coming next.
Business forecasting removes some uncertainty from the decision-making process by analyzing market data and trends to gather the information you need to make the best choices. It can’t predict everything, but it can give you the confidence you need to start new initiatives.
The forecasting process can align you and your team behind business decisions and contribute to your company’s preparations for the worst — and best — the market brings.
What is business forecasting?
Business forecasting is a process that helps teams make informed, evidence-based predictions about their organization’s and industry’s future performance. It uses analytical tools to evaluate past, current, and future market statistics and patterns to inform the planning process with as little bias as possible.
While business forecasts can give you insight into the probable future thanks to improved forecasting tools, artificial intelligence, and big data, it’s not infallible. Markets change, and simple tools can’t predict the unpredictable. But by combining analysis with experience, skill, and objectivity, you can use forecasting to take steps toward securing a competitive advantage in an unpredictable marketplace.
Why is business forecasting so important in business?
Business forecasting is time-intensive, but the insights can support multiple organizational areas, improving your business’ agility, adaptability, and resilience in a changing industry. Some of the benefits include:
1. Foreseeing marketplace shifts
Forecasting gives you a heads-up about potential economic and marketplace changes based on past activity. This information lets you effectively strategize and respond to challenges — or take advantage of new opportunities.
2. Reducing the cost of unexpected demand
Understanding the ebb and flow of customer demand helps you prepare for potential influxes. Your manufacturing team can ramp up production, hire more staff, and increase inventory, depending on how much product you need to release. This avoids bottlenecks and decreases time to market.
3. Establishing long and short-term goals
Using forecasting tools helps you establish realistic and relevant goals in the short and long term. Continuous predictions let you track the progress of those objectives as future expectations transition into current reality, and they give you the insight you need to adjust goals when necessary.
4. Improving customer satisfaction
When you evaluate market trends, you can see what new products or features your customers are looking for. This insight helps you produce goods and services that meet their expectations, boost sales, and drive brand loyalty.
5. Learning from the past
You can only know so much about the future, so as a forecaster, you’ll spend most of your time researching historical data. But that’s not a drawback. Reviewing the past can provide insight into mistakes, helping to adjust strategy and avoid history repeating itself.
Business forecasting techniques
Business forecasting falls into two categories: quantitative and qualitative. Your approach will depend on the amount of data available to draw on and whether you’re making predictions for the near or distant future.
Quantitative
Quantitative analysis relies on historical data to predict the future state of a market or industry. It’s a mathematical process that generates concrete insight into your company’s future course of action. You can draw on data from business records, market activity, or both.
Approaching business forecasting from a statistical angle is most useful when you’re making long-term plans and have access to large datasets. If you don’t have a statistically significant amount of data, it can affect the accuracy of your predictions.
There are four quantitative forecasting models to choose from:
Time series analysis: Also known as a trend series, this is the most common quantitative forecasting method. It uses historical data to identify common, time-based trends. It’s most helpful when you have a large amount of data and work in an industry with reliable cyclical fluctuations.
Average approach: Repetitive trends also serve as the basis for the average approach. This analysis assumes that the average of past metrics will predict future events, which is best for processes like inventory forecasting.
Indicator approach: This method evaluates trends in key economic indicators, like the Consumer Price Index (CPI), Gross Domestic Product (GDP), and unemployment rates. By monitoring these indices, you can predict how they influence the general economic outlook, business needs, and the company’s overall profitability. It’s most beneficial for organizations that rely on economic factors to generate sales.
Econometric modeling: This predictive approach uses regression analysis to identify patterns within company data and predict how variables like market trends, political forces, and indicators will interact with internal factors. Combined with historical data, forecasters can find consistencies and identify which scenarios are likely to repeat.
Qualitative
Less rigorous than the above model, qualitative analysis relies on the opinions and judgments of those directly influencing an organization’s success — the target market and leadership team — as well as outside experts. Qualitative forecasting works best when you lack enough data for a quantitative analysis.
By consolidating the information you do have, a forecasting expert will make a prediction based on that data and their own expertise. This is especially helpful when your company is entering uncharted waters, such as introducing an innovative technology to the market or adjusting to a new tax law.
Qualitative analysis takes one of two forms:
Market research: Forecast new product or service sales by gathering real-time feedback from the target audience. This could come in the form of polls, surveys, and focus groups.
Delphi method: This model solicits forecasts from subject matter experts based on company data. Using that information, their experience, and their judgment, each expert prepares an independent assessment to avoid bias. Then you’ll evaluate each report, taking note of patterns, commonalities, and divisions to establish long-term business strategies.
Types of business forecasts
Market trends can affect every company department, and different areas require different kinds of business forecasting. Some of its most common forms include:
General business predicts overall market trends and business success factors.
Financial estimates a company’s total monetary value based on current assets and liabilities.
Capital forecasts the organization’s future assets and liabilities.
Accounting projects future business costs.
Supply predicts the amount of resources necessary to fulfill customer demand.
How to forecast in 6 steps
Regardless of the type or what model you choose, business forecasting will follow the same general process:
1. Define the problem
Are you trying to forecast future sales, estimate holiday demand, or predict the impact of a new shipping policy? Choose which question you want to answer and make it clear to every participant.
2. Choose the variables and data
Next, identify the ideal data and theoretical variables you want to assess and the best ways to gather it. This could include anything from market research to customer satisfaction.
3. Make assumptions
Simplify the analysis process by making explicit assumptions about what data to include. You could limit the dataset to the last five years or remove outliers from consideration. This saves time and avoids the collection of unnecessary information.
4. Select your model
Choose the analysis method best suited to the datasets, variables, and assumptions you’ve set.
5. Analyze
Conduct the analysis and draft your forecast based on the results.
6. Verify accuracy
Compare the forecasted results to the actual outcome to improve the process, adjust the variables, and, in the case of an accurate projection, offer congratulations on a job well done.
Business forecasting examples
There are many potential use cases for every type of business forecast. Look at these real-world scenarios to see what kinds of situations call for the forecasting process:
A department store researching how many temporary workers they need for the upcoming Christmas season
A clothing company forecasting sales for the next quarter to understand how much to manufacture
A small business budgeting the financial impact of its monthly rent and staffing costs
A tech company investigating the potential demand for a new feature that has never been done before
A company deciding on the viability of scaling up in the current economic climate
Tools that support business forecasting
Now that you’ve completed business forecasting, it’s time to plan. Put Strategic Roadmaps by Tempo to work on creating audience-friendly roadmaps to prioritize ideas, manage data, and keep track of all your projects. Project roadmapping helps improve strategic organization and centralize team collaboration behind all your organization’s important initiatives.
