describes the process of making predictions concerningthe future based on the present and past information (Hyndman &Athanasopoulos, 2014). Forecasts are made continuously in differentfields including business, government, economics, and finance amongothers. It has been considered an important aspect in theabove-mentioned areas. This report will discuss the different typesof forecasting as well as the strategic importance of forecasting.
This is an approach of forecasting that utilizes expert judgment orintuition instead of the numerical analysis. This type depends on theknowledge of highly-experienced consultants in providing insightsinto the future outcomes. This approach is most useful in scenarioswhere it is projected that the future outcomes will disappearmarkedly from outcomes in earlier periods. For instance, sales trendmay show that sales are likely to increase in the following year,which can only be measured through trend analysis. Nevertheless, anexpert in the sales department may indicate that there will be amaterials shortage from a chief supplier a move that may force salesto decrease. In such a scenario, qualitative forecasting will beexceedingly useful. Qualitative forecasting may also be useful in theabsorption of large amounts of narrowly-focused data in discerningtrends, which quantitative data may not find (Hyndman &Athanasopoulos, 2014). Furthermore, this approach is exceedinglyuseful in situations where there is inadequate data. In such asituation, the knowledge of an expert is required in giving abroad-based view of the expected trend in the future.
In this approach, forecasting is usually based on existing past andpresent data. Computations are necessary when using this approach.This type of forecasting is useful when there is adequate data, whichcan be used in making future predictions.
There are different qualitative forecasting methods, which includeexecutive opinion, market survey, sales-force composite, and theDelphi method. The executive opinion describes a technique where acollection of managers meet and jointly come up with a forecast. Themarket survey involves an approach which utilizes interviews andsurveys in judging preferences of customers and assessing demand.Alternatively, sales-force composite is a technique where eachsalesperson is given the role of estimating the sales in his/herregion. The estimates made by the salesperson are considered as theforecasts during the period. On the other hand, the Delphi methodentails an approach where a group of experts comes together andreaches a consensus agreement concerning a prediction (Hyndman &Athanasopoulos, 2014).
In this approach, there are two methods, which are the time-seriesmodels and associative models. Time-series models usually focus onthe past data patterns and try to predict the future trend based onthe pattern contained within the available data. Time-series modelsinclude simple mean, weighted moving average, simple moving average,naïve, trend projection, seasonal indexes, and exponentialsmoothing. Alternatively, the associative models assume that thevariables, which are being forecasted, are related to other variablesthat are in the environment. These models attempt to predict based onthe associations amid variables.
Strategic Importance of
is exceedingly important in different fields. One of theareas where forecasting is important entail the financial services.In financial services such as asset pricing, asset management,mergers and acquisitions, insurance, and investment banking,forecasting has been deemed to be of immense importance. It iscrucial to have forecasts in the financial services because thishelps in making significant investment decisions. For instance,portfolio managers can make forecasts on asset returns, which canassist in making the decision of investing in the asset or not(Higgins, 2011).
is of key importance in financial risk management. Thepredicting of asset return volatility is usually associated with theforecasting of asset returns. Practical approaches have beendeveloped for forecasting volatility and are now applied broadly.Forecasts of volatility are critical in evaluating and insuring riskslinked to asset portfolios. Volatility forecasts are also significantfor firms and investors who need to price assets like options andother derivatives.
Also, when faced with the decision concerning what to produce andwhen to produce, firms use forecasts. Forecasts are critical when afirm is deciding the products mix that it will need to considerduring the production process. This is because they help inindicating a product mix that would be profitable to produce during agiven production process. Besides, forecasts are important inindicating periods that would be profitable for firms to produce.Therefore, forecasts are considered important in the productionprocess (Higgins, 2011).
entails the process of predicting variables based on thepresent as well as past data. In making forecasts, one can use eitherqualitative or quantitative approach. In the qualitative approach,expert judgment is used in making predictions for the future while,in the quantitative approach, mathematical data is used in makingfuture projections. is of immense importance because ithelps firms in making production decisions. Furthermore, forecastingis critical for investors because it assists them in makinginvestment decisions.
Higgins, M. L. (2011). Advances in economic forecasting.Kalamazoo, Mich: W.E. Upjohn Institute for Employment Research.
Hyndman, R. J., & Athanasopoulos, G. (2014). :Principles and practice. Heathmont, Vic.: OTexts.