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“Forecasting is the essence of management. The success of a business greatly depends upon the efficient forecasting and preparing for future events.” – Henri Fayol

Business forecasting methods are a bit like a restaurant menu. There are several different categories and options, and it really just depends on what you need and prefer. Your business is unlike any other, so you need to carefully choose the business forecast type and method that will serve up exactly what you’re looking for in the coming months.

What is business forecasting?

Business forecasting is predicting the economic future—along with how your business will respond. Read more in our forecasting basics guide.

Using past economic data and careful analysis of current economic conditions, business forecasting attempts to predict what will happen next for your business or industry. This type of analysis can allow businesses to prepare for shifts in the market or a change in demand. Business forecasting may change the investment and saving strategies of businesses and individuals, as well as affect the timing of new offerings. 

The business forecasting process typically involves: 

  • collecting primary and secondary sources of data
  • analyzing the datasets
  • creating strategies for projections, and finally
  • comparing your forecasting model to the realized outcomes. 

An accurate business forecast is used to create business budgets, allocate funding, make decisions about cash flow and credit needs, and to create timelines for new initiatives or acquisitions.

Forecasting methods vs. forecasting types

A forecasting type identifies the target you’re pursuing (sales, cash flow, etc.).

A forecasting method is HOW you gather and identify data (qualitative vs. quantitative).

As a business owner you’ll need to consider both types and methods of forecasting. The type of forecast will depend on the information you’re hoping to produce, so you need to start with your goals. The forecasting method is the tool you use to gather and evaluate relevant data for your forecast type. 

Business forecasting methods fall into two main categories: qualitative and quantitative forecasting methods. These methods are the specific steps you take to construct the future data you wish to use. For example, you may need a demand forecast for the coming year so you might use qualitative market research combined with the quantitative naive approach to estimate the future demand for your business. 

Today we’re diving into some business forecasting methods that can help you prepare for the future.

What is qualitative forecasting?

A qualitative forecasting method is based primarily on the best judgment and opinions of knowledgeable industry observers. While a qualitative forecast does involve some data, it relies on expert opinion rather than extensive data projections. 

Qualitative forecasting is especially helpful in industries where there have been recent disruptions that make the future vary distinctly from past practices (i.e. new laws, major innovation). It can also be used when you have insufficient historical data to reproduce a meaningful prediction. 

The two most common forms of qualitative forecasting are the Delphi Method and market research.

What is quantitative forecasting?

A qualitative forecasting method is based primarily on the best judgment and opinions of knowledgeable industry observers. While a qualitative forecast does involve some data, it relies on expert opinion rather than extensive data projections. 

Qualitative forecasting is especially helpful in industries where there have been recent disruptions that make the future vary distinctly from past practices (i.e. new laws, major innovation). It can also be used when you have insufficient historical data to reproduce a meaningful prediction. 

The two most common forms of qualitative forecasting are the Delphi Method and market research. 

The Delphi Method

The Delphi Method is a forecast technique in which a panel of experts is selected to give their opinions on the specific economic situation, then is asked for their predictions and analysis, independently of the other experts. The depth and breadth of your panel can be used strategically to improve forecast accuracy. For example, you might have experts from various different positions in a company (sales, finance, marketing, customer support) all weigh in on your panel for a broad view of the economic future. 

Pros

The Delphi Method is particularly helpful for seeing where experts agree and disagree—without the warping effects of peer pressure. When experts are asked independently they are less likely to adjust their true predictions in response to the opinions of others. 

Cons

As with any qualitative forecast, you will lack the cleancut nature of raw data. Each expert may assert a different claim and leave you without definitive results. And, naturally, experts are only human. They may be wrong, and their assertions are always subject to interpretation. 

When to use

This method is best used when there is no “right” answer, or when bias is strong. The Delphi Method is often used for long term planning, decision-making, policy making, and in new or emerging fields. 

Market research

A market research or market survey forecast has been used for generations, and involves speaking to potential customers to determine their likelihood to buy or participate in a particular economic target. For example, driving-age adults might be given a brief questionnaire to determine how likely they are to purchase a vehicle in the next five years. This forecasting technique can be executed in any number of ways, from email surveys, personal interviews, focus groups, and more. 

Pros

Market research can be highly targeted for your specific requests, such as an exact demographic audience or regarding a single product. Market research can be done no matter your budget or location. 

Cons

The value of market research depends on the quality of your survey and the sample size of your audience. 

When to use

Market research is particularly useful when you want to know more about your customers and their buying habits. Sales forecasting and demand forecasting rely heavily on market research.

What is quantitative forecasting?

Quantitative forecasting is usually the best choice for a sales forecast that focuses on observable data.

Quantitative forecasting is a complex accumulation of data searching for significant connections and patterns that may predict future outcomes. The data used in the quantitative method of forecasting can include growth and sales data from your business, demographic information from a census or survey, or any other relevant data which is available. 

When cause-effect relationships are discovered (or suspected) your business can leverage the variables for maximum benefit.

Time series analysis

In this quantitative business forecasting method, the past predicts the future through the use of averages, determining patterns, and extrapolating data. You can look at any number of variables that change over time to provide reasonable estimates for the future. 

For example, you might want to analyze the price of a seasonal product like lawn fertilizer. In a time series analysis you would assemble the price of lawn fertilizer over a designated period of time, perhaps the last year. This chronological listing or plotting of prices can provide a map of where lawn fertilizer prices might go in a similar year. 

Pros

Time-series analyses are straightforward to create and can be easily visualized in graphs or charts. Trends or changes can be easy to identify, providing an opportunity for leverage in the future. 

Cons

Contextual information is usually required to give meaning to the data of a time-series analysis, and past time periods aren’t always a good indicator of what’s to come. 

When to use

This method is best used in markets where seasonal and cyclical trends are the norm, or when you wish to find correlations with other conditions, such as GDP or unemployment. 

Causal method

Causal relationships are important in an economic climate, so forecasting how different factors might interact can help businesses better prepare. Causal forecasting can help you determine how elements like price, sales, availability, production costs, and locations might impact future sales. Leveraging a causal relationship can help you harness the power of your environment or market for your own success. 

The causal method is often a natural next step to a time-series analysis or used in conjunction with qualitative findings. For example, after completing a time-series analysis of monthly sales by price you might be able to determine that raising the price actually increases your sales for a certain product. This type of sales forecast would enable you to estimate increases or decreases in sales based on the pricing model you choose in the future. 

Pros

Identifying cause-and-effect patterns can make decisions, like price or where to spend your budget, clear and easy. 

Cons

Identifying causal relationships can be difficult, and it can be tempting to see correlations and jump to conclusions. 

When to use

Causal methods are best used when you have multiple variables to compare, and plenty of data to support a statistically significant relationship between them.

Forecasting your future

No matter the quality of data you use or the sophistication of your forecasting software, you’re simply trying to get as close to the future outcome as you can while acknowledging that you’ll never know for sure. We recommend that you use a variety of business forecasting techniques for your business, and use each one with a grain of salt. Never make dramatic or irreversible moves based on fallible business forecast predictions. When it comes down to it—your gut is a valuable asset.

Divvy provides cutting edge technology to help you use the best possible data for all of your business forecasting, budgeting, and expense management needs. Start now with a Divvy demo.

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