What is the Importance of Business Forecasting?

As a small business it can sometimes be difficult to make big business decisions that could affect your financial stability without any informed guidance. In this case, business forecasting may be the solution for you. In this article, ARB Accountants will explain exactly how business forecasting could help your business.

So, what is the importance of business forecasting? Business forecasting is important to organisations because it helps them to make justified business strategy decisions through the analysis and recognition of patterns within past data. Business forecasting gives business owners the confidence to move forward with significant business decisions. 

Keep reading to find out more about business forecasting including the main purpose of business forecasting, as well as the different types that can be done. 

What Is The Importance of Business Forecasting?

Business forecasting is important to any business because it helps them to make justified business strategy decisions based on the analysis of historical financial data. This means that businesses are not taking huge uninformed risks when making business decisions, and have a higher chance of business stability due to them having legitimate evidence to support their decisions and financial investments.

Furthermore, business forecasting also helps to identify trends within a specific market of business that is affecting business performance and success. This is important because it helps to identify avenues that are negatively affecting the performance of the business, whilst also identifying gaps in the market which may be investable and provide future opportunities for them.

What is the Main Purpose of Forecasting?

The main purpose of business forecasting is to develop stronger business strategies through informed predictions that are based on the in-depth analysis of historical data from businesses. These estimations can provide guidance for businesses moving forward and, in some cases, even result in a complete shift in strategy if a pattern is identified that could result in a negative impact on the company. 

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For example, if a company wants to predict future revenue but has only limited historical data, they can use business forecasting to complete market research in the form of surveying their customers to identify how likely customers are to return and make future purchases. Whilst the finding would not be definite, they would still provide estimated guidance that could determine changes in business strategy. 

Types of Business Forecasting

Business forecasting comes in a variety of forms to meet the demands of what businesses are looking for with regard to support. Below we have detailed the different types of forecasting in detail. 

Qualitative Forecasting: 

Qualitative forecasting is a model of business forecasting that involves data from market research to drive decision making. This type of business forecasting is useful to businesses that have limited historical data because it provides them with genuine opinions from either their customers or experts in their market which can help to develop informed business strategies. Qualitative forecasting can involve market research in the form of polling a large group of people on the use of a product to determine their opinions and whether they would repurchase the product again.  Furthermore, it can also involve the use of the Delphi technique, which involves asking a group of experts for their general opinions on a topic or product before compiling them into a strategised business plan.

Quantitative Forecasting: 

Quantitative methods of forecasting is a numerical data based type of forecasting that involves using historical data and trends to determine future revenue and performance of businesses.

Quantitative forecasting relies less on human opinion and more on solid data in order to avoid the unreliability of qualitative data and create a stronger business strategy. This type of forecasting is useful in determining the future of variables such as sales, housing prices, and gross domestic product which all contribute to various business decisions.

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Methods of Business Forecasting

Within business forecasting, there are a variety of different methods that can be used to help make justified estimates for the future of a business. These methods include the time series method, the indicator method, and the econometric method which are detailed below.

Time Series Method: 

The time series method of business forecasting involves using past data to predict future events. This method relies on placing more emphasis on the most recent data or discounting outliers to identify the most impactful data. This is important because it helps to identify the data that is most relevant to the current performance of the business to create informed strategies that predict the future of the business. 

The Indicator Method:

The indicator method of business forecasting relies on the relationship between indicators such as the gross domestic product rate and the unemployment rate remains unchanged over a period of time. By following the relationship between these indicators businesses can determine the future performance of their businesses by identifying changes in trends that directly affect the business. 

Econometric Method: 

The economic method involves testing the internal consistency of data sets over time and the significance of the relationship between data sets. This method compares sales with external factors that contribute to the rate of revenue that can be produced. This data can then be used to create informed business plans and strategies to help the progression of businesses. 

Accountancy Services at ARB Accountants

ARB Accountants are small business accountants based in Essex. Our chartered accountants can help save you time, money, and hassle, as well as provide you with business forecasting services that can help you plan strategies for the future of your business.

For more information on ARB Accountants’ business forecasting services click here

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