When building a business, business owners certainly need to control production. Therefore, they need to use forecasting to do so. Small and medium-sized businesses, or MSMEs, rarely use sales forecasting. This method of sales forecasting is more commonly employed by large companies.
All business owners need to understand forecasting to determine production capacity. By comprehending sales forecasting, it will be easier for business actors to determine supplies and the supply chain. So, what is forecasting? Below is the complete definition and its purposes.
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What is Forecasting in Business?
Forecasting
Literally, forecasting means predicting. In business, forecasting is a method used for efficient and effective planning. It encompasses various aspects such as procurement of goods and services, production capacity, and budgeting related to operations.
The marketing division typically uses the forecasting method to foresee demand levels and associated anomalies. It is frequently employed to address customer demand during specific seasons.
By utilizing the sales forecasting method, business owners can reduce expenses and avoid losses caused by excessive operating or production costs. This approach enables the optimization of production capacity, resulting in efficient business operations.
However, it is essential to distinguish between forecasting and planning. Although these two methods may appear similar, they carry distinct meanings. Planning is the outcome of forecasting.
Once a company successfully forecasts sales, it obtains valuable insights for business planning. The data derived from forecasting is utilized for budget planning, developing business strategies, and determining production capacity. In essence, planning entails activities achieved within a specific timeframe, while forecasting involves analyzing future occurrences.
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Purposes of Forecasting
After comprehending the significance of forecasting, it can be concluded that this method is crucial prior to making decisions. The purpose of forecasting is to determine the optimal production capacity that can yield efficient results without incurring losses. Additionally, there are other objectives associated with forecasting:
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Evaluating Company Policies
Forecasting allows business owners and the marketing team to evaluate policies that have been formulated and implemented in advance. These evaluations serve as significant considerations to assess their future impact.
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Estimating Time Delays
This method also aims to account for the estimated time delay involved in making sales decisions. It provides a comprehensive calculation of the time required for decision implementation.
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Serving as a Foundation for Decision Making
Forecasting methods serve as a foundation for making informed business decisions. The marketing team’s forecasting method enhances the effectiveness and efficiency of decision-making processes when the plan is in line with it.
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Types of Forecasting Methods
Forecasting
Although they lead to one goal, the forecasting methods actually have several types. These types are categorized based on the intended purpose. It is known that there are three types of forecasting: those created based on time, those based on function and purpose, and those based on data. Here are several types of sales forecasting methods that you need to know:
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Forecasting based on function and purpose
This forecasting is based on function and purpose. The forecasting method can be adjusted according to the company’s objectives. This type of forecasting method is divided into several types:
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Sales Forecasting
It involves forecasting the number of items that can be sold by analyzing previous sales data.
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Financial Forecasting
It aims to estimate the capital and costs that will be incurred.
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Demand Forecasting
It helps in understanding and recognizing future market conditions.
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General Business
It refers to forecasting from political, socio-cultural, economic, and other perspectives that impact business operations.
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Forecasting based on data
Sales forecasting methods can also be based on the data already available to the company. However, there are two types of data-based sales forecasting methods:
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Quantitative
When the company possesses ample data, this method can yield more accurate forecasting results. Using a data-driven approach and numerical analysis enhances the effectiveness of the decision-making process. The data used in this method is typically derived from a range of 3 months to 2 years earlier.
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Qualitative
If the company lacks sufficient data, the forecasting results can be more subjective, leading to diverse outcomes. Qualitative forecasting relies on economic data analysis, interviews, and market research as examples of this approach.
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Forecasting based on time
Apart from the aforementioned types, there are also sales forecasts that are based on time. There are three forecasting methods based on time:
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Short-term
This sales forecasting method utilizes data from a relatively short period, ranging from 0 to 3 months.
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Medium-term
The medium-term sales forecasting method incorporates data from the previous 3 months to 2 years.
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Long-term
The long-term sales forecasting method encompasses data from an extended period of time, specifically two years or more.
That is the explanation of sales forecasting methods. The sales forecasting method is particularly beneficial for business owners aiming to address fluctuations in consumer demand during specific seasons. With advanced forecasting, companies can precisely determine their production capacity, leading to effectiveness and efficiency and thereby avoiding losses. This comprehensive approach to business planning allows for continuous growth and improvement in the future.
