What are Forecasting Models and How Often Should You Be Using Them?

It is not unusual to hear a company’s management team discuss forecasting whether it be about forecasted economic growth, markets, or sales numbers. A forecast is an informed guess and can help with business decision-making.

There are two overall approaches to business decision-making, qualitative models and quantitative models. Qualitative models are very successful for short-term predictions, when the scope of the forecast is limited. These models often depend on the market and can be useful in predicting the short-term success of companies, products, or services but has limitations due to its basis on expert opinions over lots of measurable data. Market research such as polling a large number of people about a specific product or service to predict how many people will buy it once it is launched is a type of qualitative model.

Market research may be useful to your company, particularly if you are planning a product launch or trying to determine your company’s business niche. It can be expensive to conduct market research with a marketing firm or gain access to market research, but it may be worth it to your company.

Quantitative models take the human element out of forecasting, relying instead on data. These models try to forecast sales, gross domestic product, housing prices, and similar entities and typically focus on the long-term, measured in months or years. Quantitative models such as sales forecasting can help you make predictions on your business income as well as help you budget, purchase inventory, and hire correctly.

Business forecasting is very useful for businesses, but it is not without problems. The main issue is that the data used to make a forecast is always going to be old. Historical data is all we have to go on and there is absolutely zero guarantee that current conditions will continue into the future. It is also impossible to factor in unique or unexpected events. Weather, disasters, politics, and rapidly changing technology can all have impacts that are hard to plan for before they happen.

It is careful to balance planning based on historical data with an idea of what is happening in the business now. Failure to adjust a budget that was based on a forecasting model or lowering the amount of inventory you order next quarter due to an incorrect forecast is not helpful, only hurtful. Used carefully, you can plan ahead for your business needs and raise your chances of staying healthy through a variety of market conditions.