Page 137 - Data Science class 11
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• Establishing a New Business: A number of business forecasts are required at the time of starting a new business.
One has to predict the demand for the product, the caliber of competitors, their share in the market, sources of raising
finance, etc. Precision in such forecasts is therefore valuable for the success of a business.This will in turn help the
operations of the business to run smoothly, thereby minimising the chances of any failure.
• Formulating Plans: Forecasting provides a logical basis for preparing plans. It plays a major role in managerial
planning and supplies the necessary information. The future assessment of various factors is essential for preparing
plans. In fact, planning without forecasting is an impossibility. Henry Fayol has rightly observed that the entire plan of
an enterprise is made up of a series of plans called forecasts.
• Estimating Financial Needs: Adequate capital is a necessity for every business. Correct estimates of financial
requirements are there to prevent businesses from suffering from inadequate or excess capital. Forecasting of sales,
expenses, revenue, etc. helps predict financial needs. Financial planning is based on systematic forecasting.
• Facilitating Managerial Decisions: It paves the way for sound managerial decisions about personnel, materials, and
sales, etc., by providing a rational foundation for anticipating and judging the nature of future business operations.
3.1.4 Disadvantages of Forecasting
Even the disadvantages can be overcome with the right people, technology and right approach.
• Forecasts are never 100% accurate: Obviously, it's hard to predict the future. Despite having a great technique in
place and an expert panel at your disposal, your forecasts might not be accurate. This is primarily because products
and markets are volatile in nature. Sometimes there is no one specific reason for a surge in demand as many factors
come into play.
• It can be time-consuming and resource-intensive: Forecasting calls for a lot of data gathering, data organising, and
coordination. Companies typically hire a team of demand planners who are in charge of coming up with the forecast.
But in order to do this well, demand planners need considerable input from the sales and marketing teams. Also, it’s
not uncommon for processes to be manual and labour-intensive, thus making them time-consuming. But if there is
the right technology in place, this is much less of an issue.
• It can also be costly: Employing a team of demand planners is a significant investment. When you add to that
the cost of using cutting-edge quality instruments, the upfront fees might quickly pile up. Investing in modern
technologies,prime talent, and sound forecasting methods, on the other hand, is nothing more than that. If investment
is done correctly, it will yield positive results.
• Forecasting can be dangerous: Forecasts become a focus for companies and governments, mentally limiting their
range of actions by presenting the short-to long-term future as pre-determined.
• Not every situation can be predicted: This is one of the disadvantages of demand forecasting. For example, severe
weather could affect product or material supply accessibility or transportation logistics.
• Financial Forecasting Inefficiencies and Lack of Data Credibility: From insufficient information to disconnected
data within the forecast, a number of forecasts have credibility issues. Often the forecasts are unable to tell the true
story of where the business is going.
3.1.5 Basic steps in the Forecasting Process
The forecasting process may involve following five forecasting processes:
Step 1: Problem definition
Step 2: Gathering information
Step 3: Preliminary exploratory analysis
Step 4: Choosing and fitting models
Step 5: Using and evaluating a forecasting model
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