FORECASTING AS A PLANNING TOOL
Meaning: Forecasting is the systematic development of predictions about the future. Managers must estimate how future internal and external environment conditions will affect operations in their organizations. Organizations must estimate the changes in environmental conditions so as to quickly adopt to such changes which occur rapidly and which are likely to affect their planning activities and other operations.
- Revenue forecasting – carried out by businesses, banks, governments to determine what their future revenue will be
- Marketing and sales forecast – concerned with demand forecasting of a company’s good and services
- Human resource needs for the future
- General economic conditions – concerned with past GNP trends, consumer price index, private investment expenditure, government expenditure, balance of payment trends, population trends, trends in the interest rates etc.
- Social environment – concerned with trends in societal values
- Political environmental changes
- Future technological changes etc.
1) Qualitative methods – involves judgmental estimates of the future. The methods included
Brainstorming – This method uses a group of individuals with common knowledge in a specific problem area. The brainstorm allows free flow of creative comments from participants. Expert opinion is sought and refined. Independent experts are consulted who give their opinions which are evaluated and accepted when the opinions are in agreement.
Scenarios development – this is an approach used for handling the lack of precision in forecasting. It involves development of several scenarios each scenario providing a different set of assumptions about future events. The scenarios describe a logical sequence of events that might occur in future
Derived forecast – refers to a phenomenon that has been forecasted by a government agency or other experts and is closely associated with variables to be predicted. A forecast may be derived from this estimates.
2) Quantitative methods – Involves the use of mathematical models to predict the future. The actual data is used in forecasting e.g. time series analysis, ratio analysis, budget forecasting, computer modeling etc.
Difficulties faced by managers when forecasting
- Rapid fluctuation in external environmental conditions. This may affect the results of forecasting
- Lack of training on effective use of forecasting tools
- Cost of forecasting e.g. surveys are very expensive
- Lack of appreciation by manager of the important of forecasting or planning and other management decisions
- Inaccurate data used in forecasting hence poor results and decisions
- Inaccurate judgmental estimates e.g. in brain storming sessions
Meaning of a budget – A budget is a description of spending and financing plans of an individual, business, or government. As a planning tool, budgeting enables managers to plan for the financial implication of the principal activities to be implemented in the organization.
Importance of budgeting to managers
- Serves as a planning and control tool by setting predetermined criteria against which managers can compare actual results of their performance
- Serves as a tool of coordinating the activities of various functions and operating segments of the organization
- Provides managers with the basis for allocating resources
- Information provided by the budget enables managers to estimate and anticipate financial results / future commitments