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Business Forecasting

As an instructor in the gradate curriculum I had the opportunity to instruct both undergraduate and graduate students in the fine art of Operations Management. Among the various topics covered in this class forecasting carried special significance. When I polled the class, not many students had the opportunity to experience and practice forecasting. However, most knew the need and importance to set goals normally as a by-product of the planning cycle. Allow me to share the differences between the three. Forecasting is a prediction of future activity normally using past data and/or expert opinion. A forecast is the main driver to future performance and although faced with various uncertainties can still be used as an estimate to calculate budgets. The budget in itself sets targets (goals) to meet the requirements of the firm to realize growth. The plan is a detailed road map defining actionable items the firm must pursue to meet the budget.

The importance of forecasting as a business tool cannot be over emphasized. It is the first step in the budgeting process. It will allow the firm to formulate future activities related to new products in the market as well as uncertainty in global markets. Yes, there is risk when formulating a forecast due to the potential effects of environmental factors outside the control of the firm. Case in point, firms cannot forecast for natural disaster. So the forecast is an educated estimate using in most cases mathematical modeling. The beauty of a forecast is the ability to re-cast the numbers throughout the year. After all forecast accuracy is the highest the closer the firm gets to real time. Use weather forecasts as a point of reference.

The output from the forecast then serves as the input to the planning cycle. Capacity, capital and material requirement are all outputs as a result of the forecast. At this time the firm may study excess as well as constraint from these outputs and respond appropriately. In my operations experiences this piece of the plan is the most critical as the firm sets the stage for the next cycle of activity. How well the firm formulates and then implements the forecast to plan cycle is critical.

The final piece, setting goals (targets) is equally important. Setting of goals may be directly related to the forecast or may be in excess of the forecast generally referred to as stretch goals. Here is where all the hard work and expertise related to the forecast are converted to metrics. These metrics will be used to gauge performance. If these metrics are not to target corrective actions will be required.

Forecasting and goal setting have several draw backs. The first, an overzealous forecast will yield a plan that cannot be achieved and constant corrective actions. This leads to demotivation. Secondly, stretch goals that are far in excess of realistic expectations will yield the same results.

Forecasting and goal setting as an output should be a skill all business students should study and master. For those already in the workforce it is not too late to add this skill to your managerial tool box!

Related Benedictine Programs

If you’re interested in learning more about analytics, Benedictine’s MBA program provides a course on Operations Management and prepares you to successfully lead organizations through the challenges of 21st-century business management. Benedictine University also offers Bachelors degree programs. To learn how an online degree from Benedictine can help you hone your leadership skills talk to a Program Manager today.

About the Author

Pete Papantos is an operations director at a Fortune 500 company. He is responsible for the global execution of their strategic plan and driving operational excellence using lean methods. In addition, Pete is a graduate instructor with emphasis in operations and strategic management — both in traditional and online settings.