Forecasts provide informed glimpses into possible future outcomes of business activities, or future market conditions a business will be faced with. Forecasts are useful for strategic decision-making, as they can provide business owners and managers with a relatively reliable look into an otherwise uncertain future. Managers can create forecasts covering monthly, quarterly and annual periods, providing different levels of insight and featuring different levels of reliability. Understanding the difference between different forecasting time-frames can provide guidance when reading or developing forecasts.
Types of Forecasting
Business owners and managers develop forecasts for a variety of different valuations and metrics. Sales and earnings forecasts are popular among publicly traded corporations, providing guidance to investors and stock analysts. Sales forecasts predict how much gross revenue a company will bring in throughout a specific period, and earnings forecasts predict the amount of profit that will be left over after costs are subtracted from sales. Managers can also forecast costs for internal planning purposes. Costs can vary based on purchase volume, economic factors, legal factors or other influences. Demand forecasts can be useful for both internal decision-makers and external stakeholders, providing guidance on how quickly a company believes it will gain market share.
Monthly forecasting is highly influenced by short-term trends coming off of prior months, or by data from the same month in previous years. Planners and budgeters can adjust these short-term forecasts month-to-month, providing a greater degree of accuracy and insight to forecast readers. Monthly forecasting can be the simplest forecasting time-frame, as managers only have to look forward several weeks, relying on a range of useful and timely data from the prior month. Planners can use forecasts to inform other forecasting efforts. For example, planners can take last year's monthly sales data and adjust the figure based on this year's demand forecast to create a new sales forecast for the month.
Quarterly forecasting takes three months into account at once, introducing new challenges and more uncontrollable variables into the equation. Longer-term trends can emerge during a quarter which may not be apparent during a one-month period. When forecasting for a quarter, managers must consider the longer-term impacts of current strategic initiatives, and must essentially place bets on the outcomes of different sales strategies, cost-cutting initiatives, marketing campaigns or other factors that influence the metric being forecast.
Annual forecasting considers an entire year of data. An annual forecast will almost always be less reliable than shorter-term predictions, due to the amount of time in which uncontrollable variables have to arise and influence outcomes over a one-year period. Seasonal and cyclical factors become an issue in annual forecasting, requiring forecasters to consider numerous marketplace conditions throughout a single forecast. For example, a monthly retail sales forecast for December may include large sales volume and income, whereas an annual sales forecast would include the off-season summer months in addition to the busy Christmas season.
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