What is Forecasting in Business? - Definition & Models

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  • 0:04 What Is Forecasting?
  • 0:38 Qualitative Forecasting
  • 1:50 Quantitative Forecasting
  • 3:44 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.

Being able to predict what is coming next is an invaluable skill for a business. In this lesson, we look at how businesses use forecasting to make the best possible plans for the future.

What Is Forecasting?

Wouldn't your life be so much easier if you just had a crystal ball that you could gaze into and learn everything that was coming your way? Unfortunately, such a thing does not exist. However, just like we'd like to know the future, companies need to have as good of an idea as possible about what is coming their way.

As a result, companies attempt to forecast future events. Forecasting refers to a company's ability to try to figure out what is coming along in the future by using information available today. In this lesson, we're going to take a look at the two major types of forecasting as well as examples of each.

Qualitative Forecasting

Companies make use of qualitative forecasting to make predictions about data that is not necessarily numbers-driven. That means that it is often short-term information, such as the most popular color of a chair that is to be manufactured. Such information can often be found by polling a number of people.

However, for more complicated forecasts, you can also go straight to the experts. Despite the risk of doing so, a number of businesses still operate in some pretty dangerous regions of the world. Many of them continue to do business in these areas based on political risk forecasts of what is, hopefully, likely to happen in those places. Based on this information, they have decided that the potential for profits outweighs the potential for risk.

Let's say that you were the owner of an oil company that had an interest in the Middle East. You were curious about whether or not a certain country in that region was going to remain politically stable enough for the next five years for your contract to be completed. After all, localized warlords rarely follow business deals made with multinational corporations. To find out, you would ask a number of experts on the Middle East, especially the country in question. In doing so, you'd get a qualitative forecast about what is likely to happen there.

Quantitative Forecasting

However, qualitative forecasting has its limitations. As you're probably thinking, it is based on opinions and beliefs, not necessarily numbers. Also, forecasting must have some quantitative element to be useful to your departments that handle trying to figure out how much of a good to produce. Luckily for you, there is quantitative forecasting, which focuses on forecasts that provide numbers you can use directly to plan for the future.

There are a number of different quantitative forecasting systems that exist. The most simple of these is the indicator method, which uses some basic ratios between indicators like tax rates, GDP, consumer demand, and the like, to make assumptions about the future.

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