Why is forecasting important for business?
Forecasting is important because businesses thrive on being prepared. If you are a business owner, you need to know as accurately as possible what your outlook will be in the future. You need to know this in order to anticipate, for example, how much of various products you will need to order from your suppliers or how much (if at all) you will need to expand your manufacturing capacity. If you do not have good forecasts of things like sales volume for the next year, you will be unable to buy the right amount from your suppliers and you might end up with excess inventory or you might run out of materials at a time when demand for your product is high.
Businesses operations take place in a web of interactions. Forecasting helps businesses to make adjustments in their operations that reflect observed changes or anticipated changes in the business environment. Forecasting is important in most business units. Changes in domestic and international economic situations are likely to generate changes in business forecasts. A timely example is the fiscal crisis of 2008 – 2010. Less money circulating in consumers wallets meant lower domestic and international sales. Consumer confidence (i.e., measures of how much consumers are spending for discretionary purchases) is an economic forecast, but businesses take that national economic information to modify their own business forecasts. Conservative estimates of consumer confidence by businesses help to prevent overspending during tight economic times.
For example, many business enterprises have a supply chain in which other businesses are partners, of a sort. A supply chain may be made up of many vendors (as in a multinational company), or just one or two. Regardless, those supply vendors depend on orders from other businesses. Supply orders sent from business “A” to vendor “B” will impact both “A” and “B.” And just-in-time-inventory (where a business orders only the materials it needs for the next few days or weeks) creates a situation where business “A” and vendor “B” must practice good communication about providing and selling supplies. Business “A” will have better relationship with its vendor/partner “B” if it can anticipate how many “widgets” it will need from vendor “B.” If vendor “B” knows the forecast of business “A” for buying widgets, vendor “B” can be prepared to sell those widgets to business “B” and maybe even have more / fewer widgets to sell to business “C” and business “D.”