Steps of Forecasting

What is Forecasting?

Forecasting is about making smart guesses about what might happen in the future by looking at past information and patterns using math-based methods. It’s important for making choices, planning, and dealing with risks in areas, like business, money matters, economics, and even weather forecasts. There are two main types of forecasting qualitative forecasting and quantitative forecasting. 

Qualitative forecasting uses the ideas and thoughts of experts to guess what might happen in the future. It is helpful when there is not much past information or when it is hard to measure the factors affecting the situation. Quantitative forecasting uses math and numbers to look at past data and find patterns or trends. It works best when there’s a lot of reliable past information and when the connections between different things can be measured with numbers. We will talk about the types in detail under the head techniques. 

Steps in the Process of Forecasting

The process of forecasting involves a series of steps to make sure that predictions are accurate and help in effective decision-making. Here are the key steps in the forecasting process, explained in a simple and easy-to-understand way:

• Set clear goals: Start by deciding what you want to predict and why. Figure out the purpose of the forecast, and choose the time frame you’re interested in, whether short-term, medium-term, or long-term.
• Gather information: Collect past data related to your forecast, like previous sales numbers, market changes, or economic signs. Make sure the information is correct, trustworthy, and up-to-date to get the best possible forecast.
• Choose a method: Pick the right forecasting technique based on your goals and the available data. There are various methods, including qualitative approaches (like expert opinions) and quantitative methods (such as statistical models and algorithms).
• Analyse the data: Use the chosen method to examine the data and look for patterns, trends, or relationships. This analysis will help you make informed predictions about future events or outcomes.
• Make the forecast: Based on your analysis, make educated guesses about what might happen in the future. Keep in mind the limitations of forecasting and the uncertainty of the future while making your predictions.
• Validate the forecast: Check your predictions against actual outcomes or historical data to see how accurate your forecast is. This step helps identify any issues or inaccuracies in the forecasting process and can guide improvements in future forecasts.
• Review and adjust: Regularly review your forecast and update it as new information becomes available or conditions change. Stay flexible and be prepared to modify your predictions and plans as needed.

Techniques of Forecasting

Forecasting techniques are important tools for businesses and managers to make informed decisions about the future. By using these techniques, they can anticipate future trends and make plans to succeed in the long term. Some of the techniques are explained below:

• Time Series Analysis: It is a method of analyzing data that is ordered and time-dependent, commonly used in fields such as finance, economics, engineering, and social sciences. This method involves decomposing a historical series of data into various components, including trends, seasonal variations, cyclical variations, and random variations. By separating the various components of a time series, we can identify underlying patterns and trends in the data, and make predictions about future values. The trend component represents the long-term movement in the data, while the seasonal component represents regular, repeating patterns that occur within a fixed time interval. The cyclical component represents longer-term, irregular patterns that are not tied to a fixed time interval, and the random component represents the unpredictable, random fluctuations that are present in any time series.
• Extrapolation: It is a statistical method used to estimate values of a variable beyond the range of available data by extending or projecting the trend observed in the existing data. It is commonly used in fields, such as economics, finance, engineering, and social sciences to predict future trends and patterns. To perform extrapolation, various methods can be used, including linear regression, exponential smoothing, and time series analysis. The choice of method depends on the nature of the data and the type of trend observed in the existing data. 
• Regression Analysis: Regression analysis is a statistical method used to analyze the relationship between one or more independent variables and a dependent variable. The dependent variable is the variable that we want to predict or explain, while the independent variables are the variables that we use to make the prediction or explanation. It can be used to identify and quantify the strength of the relationship between the dependent variable and independent variables, as well as to make predictions about future values of the dependent variable based on the values of the independent variables.
• Input-Output Analysis: Input-Output Analysis is a method of analyzing the interdependence between different sectors of an economy by examining the flows of goods and services between them. This method helps to measure the economic impact of changes in production, consumption, and investment in a given economy. The fundamental principle of Input-Output Analysis is that each sector of an economy depends on other sectors for the supply of goods and services, and also provides goods and services to other sectors. These interdependencies create a network of transactions between sectors, which can be represented using an input-output table.
• Historical Analogy: Historical analogy is a method of reasoning that involves comparing events or situations from the past with those in the present or future. This method is used to gain insights into current events or to make predictions about future events by looking at similar events or situations in the past. The premise of historical analogy is that history repeats itself, and that by studying past events, we can gain an understanding of the factors that led to those events and how they might play out in similar situations. For instance, political analysts may use the analogy of the rise of fascism in Europe in the 1930s to understand the current political climate in a particular country.
• Business Barometers: Business barometers are statistical tools which are used to measure and evaluate the overall health and performance of a business or industry. These barometers are based on various economic indicators, such as sales figures, production data, employment rates, and consumer spending patterns. The main purpose of a business barometer is to provide an objective and quantitative measure of the current and future state of a business or industry. By analyzing these economic indicators, business owners and managers can make informed decisions about their operations and strategies.
• Panel Consensus Method: The Panel Consensus Method is a decision-making technique that involves a group of experts sharing their opinions and experiences on a particular topic. The goal of this method is to arrive at a consensus or agreement among the group on the best course of action. In the Panel Consensus Method, a panel of experts is selected based on their knowledge and experience in the relevant field. The panel is presented with a problem or issue to be addressed, and each member provides their opinion or recommendation. The panel members then discuss their opinions and try to reach a consensus on the best course of action. It can be used in various fields, such as healthcare, business, and public policy, among others. It is particularly useful in situations where there is no clear-cut solution to a problem, and multiple viewpoints need to be considered.
• Delphi Technique: The Delphi Technique is a decision-making process that involves a group of experts providing their opinions and insights on a particular topic or problem. This method is designed to reach a consensus on a course of action using a structured and iterative approach. In this, a facilitator presents a problem or question to a group of experts, who then provide their opinions or recommendations. The facilitator collects the responses and presents them to the group anonymously. The experts review the responses and provide feedback, revisions, or additions to the responses. This process is repeated until a consensus is reached.
• Morphological Analysis: Morphological Analysis is a problem-solving method that involves breaking down a complex problem or system into smaller components, referred to as “morphological variables”. These variables are then analyzed to identify potential solutions or courses of action. It begins by assembling a team of experts or stakeholders to identify the variables contributing to the problem or system. These variables may be identified through brainstorming or other techniques and may include factors such as technology, human behaviour, or environmental conditions.