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Forecasting: Strategic Role, Components & Types

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  • 0:02 What Is Forecasting?
  • 0:57 The Role of Forecasting
  • 1:36 Businesses and Forecasts
  • 2:23 Types of Forecasting
  • 3:56 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Until companies can acquire a crystal ball in order to look to the future, the best they will be able to do in trying to predict their next moves comes from forecasting. In this lesson, we look at how it is used and the different types.

What Is Forecasting?

Business is full of uncertainty. If you own a small store there's no guarantee that there will be people coming through your door tomorrow. Or there could be a flood of people. You just don't know. If there were ever a job in which a crystal ball to see the future would be useful, it is certainly that of a business manager. Unfortunately, I can't give you a crystal ball to see the future. However, business leaders have developed what is, at least until time travel gets perfected, the next best thing.

Forecasting allows managers to make reasonable assumptions about future events and plan for the outcome. While it's not as precise as the future itself, it is a much better method than just about anything else we've been able to come up with. In this lesson, we'll start by looking at the role of a forecast, then look at how businesses communicate their forecasts. Finally, we'll take a look at the major types of forecasting.

The Role of Forecasting

Perhaps a crystal ball is not the best example I could give. After all, the people who actually produce the forecast would be very quick to tell you that these are just informed guesses and are by no means them predicting the future. However, that's actually how companies use them: as a pretty good guide to what comes next. If you've been studying business for long, you probably know that companies use budgets mainly as a planning tool. Forecasts help managers make the most accurate budgets for what they expect to see coming. For example, if a forecast predicts that a company will need to raise production in order to remain competitive, a good budget will show a plan on how to get those new numbers in the most efficient way possible.

Businesses and Forecasts

So, now that we have a better understanding of the role of forecasting, let's talk for a minute about how often a company should forecast. After all, there is a happy medium to be struck here. A company that spends too much time forecasting is likely not to be making wise use of its capabilities and may fall short of meeting its forecasting goals. Meanwhile, a company that doesn't forecast at all doesn't really have any true guidance and is just humdrumming along until something forces it to change its ways. As a result, companies tend to create forecasts every quarter. This means that they have the flexibility to adjust the changing market conditions as they emerge, but also means that they don't get caught up dealing with the intricacies of new forecasts every few weeks. Of course, if market conditions change drastically, new forecasts can always be prepared.

Types of Forecasting

Now that we understand the role and timing of forecasts, let's look at the components and types of forecasts. Largely the components that make up a forecast will consist of:

  • The question posed
  • The data gathered
  • The outcome recommended by that data

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