Planning

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Topics to be discussed
Forecasting
Planning & Forecasting
Advantages of Forecasting
Limitations
Techniques
 Forecasting
Forecasting: Predicting future
needs on the basis of historical
data, present conditions, and
assured future.
Forecasting controls staffing,
purchasing, and production
decisions.
Forecasting is a very important
function!

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 Forecasting
Business forecasting is a systematic attempt to
probe the future, so as to recognize the problems
& opportunities & turn them into plans of action.
It helps in analyzing the economic, political &
market information to reduce the risks involved in
making business decisions & long-term plans.
It makes managements think ahead & give
singularity of purpose to planning by
concentrating attention on the future.
 Forecasting
It involves a ‘look ahead’ approach.
A systematic attempt is made to look into all
the influential factors( past & present),
affecting the working of the organizations.
Based on the analysis of these factors,
through sophisticated statistical & econo-
metric techniques, a reliable calculation of
probabilities about the future is made
 Forecasting
There are 4 essential elements in business
forecasting identified by Redfield.
Developing the groundwork
Estimating future business
Comparing the actual with
estimated results
Refining the forecast process
 Planning & Forecasting:
Relationship
Planning is deciding in advance what is to be
done in future.
• Futurity is in its essence. But, future is uncertain
& risky.
• Planners do not know with certainty the
conditions which will exists in the future, when
activities will take place.
• As a result they are forced to make certain
assumptions regarding future. This is forecasting
 Planning & Forecasting:
Relationship
• Forecasting provides pertinent information for
successful planning.
• Planning without forecasting proves to be wasteful
& useless.
• Fayol, “ the plan is synthesis of the various
forecasts: annual, long-term, short-term, special
etc”.
• Success of plan depends, in large measure, upon
validity & accuracy of the forecast.
 Forecasting as an Aid to
Planning
Forecasts offer pertinent information regarding
future.
It helps in bringing a singleness of purpose to
planning, that cannot exist easily otherwise.
Improves the quality of managerial planning.
Supplies the vital information regarding the weak
spots in the organization thereby paving the way
to appropriate control
Advantages of Forecasting
Is essence of planning. Forecasts are the premises or
basic assumptions upon which manager’s planning &
dm are based
Forces executives to look ahead, think through the
future
Helps in achieving better coordination by focusing
attention on the future
Helps to reveal the weak spots
Helps in identifying the environmental forces &
assists in providing for these challenges
Limitations of Forecasting

Are only estimates of future conditions &

not indicators of actual position
Shrouded by shadow of uncertainty
Rule of thumb forecasts only
Unreliable as based on predictions &
assumptions
Forecasting techniques have not been fully
developed.
 Techniques of Forecasting
According to L.S. Silk
 Techniques of Forecasting
Deterministic Techniques:
Assume that there is a close causal connection or a rough
identity between present & future.
Are employed to forecast particular elements such as
capital spending, consumer expenditure, general business
conditions etc.
Symptomatic Techniques:
Based on the assumption that turning points in economic
activity are spotted out from the information collected on
national & industrial indices.
Based on these significant changes in business activity over
a period of time & based on information collected, the
future trends are predicted.
 Techniques of Forecasting
Systematic Techniques:
• Derived from classical approach of economic theory
• The cause & effect relations among different
economic factor, which holds relevance for past,
present & future, are determined & then forecasts
are made.
• This method requires theoretical training,
knowledge of institutional & statistical facts,
technical skill & social & political insight.
 Techniques of Forecasting
Deterministic Techniques:
a) Latest information: based on the very latest information, it
is assumed that the existing conditions/trends will continue
for some time into the future. No guarantee that the
present is a copy of past. For very short periods.

b) Knowledge of programmes & limits: a number of imp.

factors having a bearing on the economic future are
determined in advance. After a careful analysis it is
assumed that these factors either remain stable or change
at a foreseeable rate in the forecast period, e.g., capital
budgets of large organizations, govt. expenditures on
goods& services, tax provisions etc.
 Techniques of Forecasting
Deterministic Techniques:
c) Spotting the beginning of a lengthy process: the close
relationship between initial & later stages of an economic process
is examined. In many cases the trends in the economy which
have started at a particular point of time will continue for a long
period. Ex. Contracts for constructing residential houses precede
actual construction. Here there is no perfect relationship between
initial & later stages, but a close relationship certainly exists which
allow forecasting to be done.

d) Diagnosing people’s expectations: the present & potential

customers are asked to project their buying intentions in a
coming period. Based on the total market share expected, mngt.
can then estimate future sales.
 Techniques of Forecasting
Systematic Techniques
a) Intuitive approach:
• The information of various economic factors is collected &
analyzed.
• By judgment & experience the analyst summarizes the main
factors, draws conclusion & then constructs various forecasts.
• Forecasting job is done continuously & forecasts are revised as &
when necessary.
• Thus forecasts are not produced by exact mathematical
techniques.
• Success largely depends on the analysts’ skill, patience, insight,
talent & information
 Techniques of Forecasting
Systematic Techniques
b) The econometric approach:
• More rigorous & scientific in tackling forecasting problems.
• Reflect the wisdom contained in the disciplines of economics,
mathematics, statistics & accounting.
• These models express the relationships among a number of
variables associated with changes in sales volume, in
mathematical terms.
• A predictive model is developed from a theory that determines
the general business activity.
• The descriptive model is turned into a predictive model by
independent regression equations.
Economic Forecasting Methods

Is one of the common types of external

forecasting
Basic aim is to predict business
fluctuations, i.e., in general economic
activity
Depending on the nature of the business,
these fluctuations affect the success or
failure of business in various ways.
Economic Forecasting Methods

There are numerous factors known as indicators

such as interest rates, stock prices, level of
employment, etc., which are frequently
employed to measure the extent of economic
activity in a nation.

The single most important indicator is the GNP.

GNP is the value of goods & services produced in

the country in a year.
 Economic Forecasting Methods

The foll. methods are commonly used to forecast the future

of GNP, which vitally affects the conditions of many
organizations in an economy:

Extrapolation: a projection of the current trend into

the future. It merely projects the trend of the past.

Lead & lag method: the historic behavior of various

indicators is studied

Econometrics : mathematical approach, main variables

are joined together in a series of equations
Economic Forecasting Methods
Extrapolation
a projection of the current trend into the future. It merely
projects the trend of the past.
Generally used to forecast such things as industry
growth, population trends, national income etc., where
changes take place slowly.
But when the fluctuations are intense & abrupt, it may be
of little use.
It also ignores the influence of such factors while
presenting the trend forecast like sudden change in
consumer tastes & preferences, technical innovations etc.
 Economic Forecasting Methods
Lead & lag method
The historic behavior of various indicators is studied
The purpose is to find out whether the indicating factor has regularly
moved in advance of the general business trend (lead group) or has
moved simultaneously with it (coincident group) or has lagged behind
it (lag group).
On the basis of major turning points in economic activity, the forecasts
are developed.

Econometrics
mathematical approach, main variables are joined together in a series
of equations
Forecasted on the basis of assumptions developed from these
equations
Sales Forecasting Methods

• Projection of the expected sales

• Various methods are:

Jury of executive opinion method

Grassroots method
User expectation survey method
Quantitative method