The Science of Business Forecasting

What are forecasts? We have been hearing this term quite frequently in our daily lives and I am sure many people think forecasts to be as real as a weather forecast. But, in a very generic sense, “forecast” means to predict for future- something which holds a time value. It could be to forecast a country’s GDP, time and human skills required, and many other aspects of commodity trading. Everything in business needs a forecast for better planning and value gains.

Forecast has monetary benefits in terms of cost and revenue gains. There are several ways to perform business forecasting. The most common method is exponential smoothing techniques. The technique works on moving averages. It is called as N period moving averages. It could be 2 period moving average or 3 period moving average as well. The simple formula to simple moving averages is given below:

Simple Moving Average =

Variations in Time series

We use the term time series to refer to any group of statistical information accumulated at regular intervals. There are possibly four kinds of variations involved into time series analysis.

  • Secular Trend
    • Example: The steady increase in the cost of living recorded by the Consumer Price Index.
  • Cyclical fluctuations
    • Example: The most common example of a cyclical fluctuation is the business cycle.
  • Seasonal variations
    • Example: Seasonal variation involves patterns of change within a year that tend to be repeated from year to year.
  • Irregular variations
    • Example: The COVID-19 pandemic is an example of irregular variations. 

Now we have few reasons to study the trends:

a. The study of trends allows us to describe a historical pattern.
b. It helps us to project past patterns, or predict trends into the future.
c. Many a times, the trends allow us to eliminate the trend component from the time series.

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