Forecasting as everything that we do, has own principles that must be known if we want to implement successful forecasting for our business.
I’ve already covered some of the most important aspects of forecasting in the previous two posts in this series about entrepreneurial forecasting. You can read more about forecasting at Entrepreneurial Forecasting – Some Questions Answered and Entrepreneurial Forecasting – Demand Forecasting.
I would like to present five basic and most important principles of forecasting. That principles are something that must be in front of the eyes of each entrepreneur before starting with the process.
1. Forecasting is Usually Wrong.
This is true, but you as an entrepreneur must be sure to know this when you forecast the future. You can’t expect 100% true forecasting. But, it is good to have 50% missing in forecasting. The future is something unknown and uncertain.
It is important for entrepreneurs to start forecasting with this principle in mind.
2. Forecasts are more correct for nearer time periods.
It is normal that if the future that you forecast is nearer to present, forecasting will be more accurate. Why is this normal? It is normal because we can easily predict our future for tomorrow than for next year. Our tomorrows is more predictable and certain than a time period after one month or one year.
3. Forecast must include an estimate of error.
Because it is expected, forecasting to be wrong, the real question is, “By how much?” As we talk in the previous part it is best this error to be expressed in terms of percentage as a difference between the reality and something forecasted. This error can be positive or negative error expressed with the positive or negative percentage. If the forecasting is about sales the positive error will be a percentage of more sales generated in dollars through the forecasted period. If we have a negative percentage as an error for the same sales forecasting, then our business generates fewer sales then it’s forecasted.
4. Forecast must rely on historical data and external environmental factors.
You can’t expect to have the same results from forecasting if on the market appear additional competitors. This means that you can’t include your historical data for demand or sales and increase them with some percent to forecast future demand or sale, because there are new competitors that probably will get some piece of cake (market).
Historical data is an important starting point of each forecasting for business purpose, but it’s not enough for better forecasting results. Your business exists in an environment where all parts from that environment are in interaction with each other. Decisions from one element interact on decisions on another element.
5. Forecasting is needing collection and preparation of data.
Forecasting is much easier if you’ve prepared quality data needed for particular forecasting. The forecast is only good as the quality of data on which it is based. Because of that all data must be recorded in same term as required for the forecast purpose.
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