What Is Forecasting?
Forecasting is the practice of using several statistical and accounting methods and techniques to predict the future of various aspects of the company like production, revenue generation, sales and selling price to name a few.
This planning is extremely important to identify where to divert the resources so that the company may function at its fullest capable capacity for the period. It also helps to know that forecasting only requires a few resources since it is made for a small period. This is where its major diversion from budgeting hails.
Budgeting is usually made for a long period of time. While the inherent function of forecasting and budgeting are the same, budgeting accounts for all the activities of the organization for, usually, an entire fiscal year.
Forecasting, on the other hand, is usually done for a required period of time to accommodate the changing tides of business, or changes in the organization’s infrastructure leading to a change in the fundamental structure of operations or revenue model, or quite simply, because the organization wants to forecast a certain period for critical decision-making.
Advantages of Forecasting
Forecasting requires just a few resources because of the fact that the period under consideration is usually small, or the scope of forecasting required for decision-making is usually restricted making it a niche function.
Forecasting puts a check on the operations of the business by the method of variance analysis. Variance analysis helps in identifying the discrepancies between budgeted and actual expenses help you have an insight of your finances for prudent decision-making.
Forecasting helps in establishing something to work for, or to anticipate something and to be prepared towards that direction, helping the organization prepare for its future.
Forecasting predicts where the resources might be useful the most and since forecasting is built on sound data, it helps in the optimal utilization of the resources of the organization.
Since forecasting helps in predicting aspects like demand and therefore manpower, supply and therefore production planning and logistics, unforeseen costs can be cut down to the bare minimum, if any, as the variance analysis will show.
Forecasting helps in planning for potential outlays regarding capital expenditure thereby ensuring the organizations prepares for these heavy outlays to prevent a cash crunch.
The Way Ahead
With inherent advantages as these, forecasting is helpful to boost growth for any organization. With the right approach, success can be achieved in leaps and bounds and is right within reach!