Corporate forecasting: what it is and how it works

  • The company forecast It is a future forecast based on present and past data that determines the hypothetical demand for goods and services at a later time.
  • To create the company forecast, companies can use the qualitative method or quantitative method.
  • Forecasting represents a decision-making approach that allows companies to better manage the impact of future uncertainty based on collected data.

In order to make forward-looking strategic choices, companies need to be able to predict market trends and to do this they resort to tools such as company forecast.

It is a useful tool for companies that want to grow their business in a thoughtful way, predicting what the demand will be in a future period of time.

We can also think of it as a business forecasting or decision making approach which is based on past and present data to determine the demand for goods and services. There are two different methods for conducting this type of analysis, one quantitative and one qualitative.

What is the company’s forecast

The term company forecast in Italian it can be simply translated to mean business forecast. Forecasting activities are precisely for predicting the future and knowing in advance what the trends will be in various aspects of the company.

Consequently, prediction is a species statement containing forecast data and serves to identify the hypothetical demand for the goods and services subsequently offered.

Along with budgeting, forecasting is an essential element of business management and offers an idea of ​​what the future may hold.

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Corporate forecasting: how it works

what is corporate forecasting

To make strategic decisions, companies must be able to predict future demand for goods and services.

This is why company forecasts are essential in a company’s decision-making process. They compose a kind of balance sheet, a statement that contains predictive data. In Italian, the most accurate translation could be “pre-final balance”.

Predictions generally come updated month to month or on a quarterly basis. In this way, companies are able to predict the direction the market is taking and modify their budget and business strategies accordingly. It is also useful for evaluating potential opportunities and risks as well as helping in financial decision making.

Unlike a company’s budget, which contains forecasts for the coming year, a forecast is a budget document based on the current year.

Corporate forecasting: the methods

Forecasting can be done by choosing between two possible methods: the qualitative method and the quantitative method. Let’s see in detail how the two methods work and the differences between them.

1. Quality Forecast

The qualitative prediction designed to provide companies with subjective results. Forecasting in this case, in fact, consists of the collection and analysis of personal judgments provided by experts, forecasters and decision makers.

These are imprecise predictions precisely because they are based on knowledge, intuition and experience. This can cause cognitive biases and distortions of different types.

2. Quantitative Prediction

The quantitative method, however, is based on an automatable mathematical process. This makes predictions more consistent and objective than the qualitative method.

For its realization we use thebig data analysis. These are then interpreted by company experts. This method, more reliable than the first, is often used by companies specifically for medium-long term planning and budgeting.

The quantitative method also includes the discipline of time series analysis by which companies examine historical data and how variables have interacted with each other in the past.

Another approach is to examine cross-sectional data to identify connections between variables, that is, through aeconometric analysiswhich often uses regression models.

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The process in forecasting the company

company forecast calculation

Regardless of the method chosen, it is essential follow a specific procedure to get accurate predictions.

First of all it is necessary expand the base of the view you intend to create through the analysis of the conditions of the company. Next, it will be necessary to determine the current position of the company in the market.

The process is based on four main steps:

  1. income statement reclassification.
  2. update and modify data;
  3. voltage calculation.
  4. input of expected values ​​in the reference period.

But let’s look at the four steps in detail.

1. Reclassification of the income statement

The first step you need to take is his account reclassification economic. This is necessary as financial statements and accounting documents alone are not able to provide the necessary information for forecasting.

In practice, a detailed analysis of the company’s expenses and profits is carried out, revising the budget plan as necessary.

2. Updating and modifying data

In order to make a company forecast that is as accurate as possible, it is necessary take into consideration. While it can be difficult to keep this data up-to-date, given the rate at which new changes are added, it’s important to get the most accurate predictions.

3. Calculation of trends

Examining industry trends is a fundamental step because it offers a easy parameter comparison. Calculating trends can be done using various tools and to have a clear picture of the company’s performance, various types of charts can be used.

In this way, it is possible at any time to access accurate data that takes into account major movements of the company during the year or years.

4. Enter expected values ​​in the reference period

At this point all that remains is to enter the forecast data. Generally the data expressed by the trend is very similar to that of the forecast. Therefore, it will be necessary to examine past data and compare it with what actually happened.

Comparing past trends with current trends provides an idea what will be the trends in the future. These must then also be combined with data relating to specific variables.

Types of Company Forecasts

typologies of company forecasts

At least they can be distinguished four types of company forecasts and I am:

  • demand planning;
  • sales forecast;
  • cash provision;
  • rolling forecast.

Each of these typologies offers predictions in specific business contexts. But let’s see them in detail.

1. Demand planning

The demand planning, or demand planning, is a method for making an external demand forecast. This is a method based on the demand for goods and services offered by the company.

In this way it is easier to proceed with the production planning and the planning of the necessary materials and warehouse capacity.

2. Sales forecast

The sales forecast consists in making a sales forecast and represents the set of techniques that allows you to more accurately determine the volume of business for a certain period in the future.

This method therefore allows you to predict future sales based on market analyses, which take into account the various factors that could have an impact.

3. Cash forecast

There cash forecast is a forecast that focuses primarily on cash flows. This tool allows you to predict in advance the income and expenses that will occur in the future. This type of forecast can be made for a longer or shorter period of time, for example a year or a month.

This type of planning can also allow for better planning of the company’s future needs.

4. Rolling forecast

The rolling forecast it is a continuous reference, a fixed forecast, which is periodically updated by the companies. It is a forecasting model distinguished by the various areas of interest and applied to every area of ​​the company.

This design can be particularly beneficial for entering new data each month based on variables that will affect the near future and knowing their trend.

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What are the advantages of company forecasting

The advantages of forecasting are many. First of all, it is useful for outside investors who use it to determine whether events affecting a company will increase or decrease its stock price.

Conversely, for those who manage the company, forecasting the company is essential to be able to exploit effective forecasting tools necessary for develop a long-term perspective of the actions to be implemented.

These predictions are also necessary to be able to analyze the possible impact of a change within or outside of business operations.

For example, company forecasting can be useful for collecting data on how changes in working hours or employee productivity affect customer satisfaction and, consequently, business results.

Company Forecast – Frequently Asked Questions

What does the company foresee?

The company forecast is an essential tool for predicting the future of the market and consists of a forecast based on past and present data. It is essential for making strategic decisions.

What is a rolling forecast?

A rolling forecast is a type of business forecast and consists of a report based on a continuous period of time. This is a fixed forecast that is updated periodically. Find out what the other types of predictions are.

What is the difference between a budget and a forecast?

A forecast is a predictive analysis aimed at the current year while a budget is a forecast made for the next year. Basically, the main difference between a budget and a forecast is about the time frame of reference.

How does the company forecast work?

The company forecast reports important information about future forecasts for the company: from possible financial income to the number of sales, to figures that may concern production.

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