Question

Why is forecasting important in organizations, especially as related to understanding the relevant time horizon to develop a forecast against? What are some examples from industry?

Answer 1

Forecasting is important due to the following reasons. Examples are presented side by side

1. Promotion of new business - forecasting is very important before promotion of new business. Proper forecasting reduces the luck factor. For example, one needs to forecast what will be the demand trend, what will be the manpower requirements, how will the competition evolve

2. Estimation of financials - No business can survive without capital and hence, adequate forecasting is required to arrive at proper fixed and working capital requirement.

3. Smooth and continous working - Forecasting is as important in operations as in planning. Forecasting in operations ensures timely delivery of goods while saving in working capital. For example, forecasting of retail demand will help the supply chain move goods accordingly maintaining the balance between timely availability and storage cost and working capital

4. Complete control - Forecasting helps management to indentify strengths and weaknesses which may impact sustainability. For example, business may forecast how will internal and external business environments will evolve and how can it deal with them.

Importance of time horizon -- Forecasting is relevant only w.r.t. a corresponding time horizon. Forecasting is not only about a quantity (how much? ) but also about answring the second question ( When?), That is why time horizon is important in forecasting. For example - There is time value of money associated with time horizon, question of sustainability is answered only in respect of time horizon.