Forecasting

Businesses need to plan ahead. Forecasting helps them decide how much stock to buy, how many people to hire, how much money to borrow and whether targets are realistic.

Forecasts are usually built from assumptions. A sales forecast might start with last year's sales, then adjust for expected price increases, new customers, seasonal patterns and economic conditions. Costs and cash flows are then forecast based on the expected sales level.

Methods range from simple to complex. A small business might project next year's sales by adding 5% to this year's. Larger companies use statistical models, market research and detailed plans from each department.

All forecasts are uncertain. Good forecasting therefore involves stating assumptions clearly, comparing forecasts with actual results to learn from differences and updating forecasts regularly. Many businesses use rolling forecasts, which always look a fixed period ahead, such as the next twelve months, and are refreshed every month or quarter.

Note: A forecast is the output of forecasting: the specific set of estimated figures produced.