Lesson 6 - Forecasting

Question 1

Forecasting

Answer 1

1. all business organizations have a need for a process that produces forecasts of expected sales and expenses.
2. forecasts need to be sufficiently accurate so company can anticipate cash flow needs and make cash related decisions.
3. accurate forecasts are a matter of business survival

Question 2

Which businesses are most at risk?

Answer 2

Those that are experiencing a high rate of growth and are experiencing growth in revenue and expenses.

Business runs a high risk of having a cash flow problem.

Question 3

Cash Flow Problem

Answer 3

More money going out than is coming in, albeit in a short

Question 4

Quantitative Forecasting Methods

Answer 4

Times Series Analysis
     1. Moving Averages
    2. Smoothing Methods
    3. Trend Projections
    4. Seasonal Influence
    5. Others
Multiple Regression Analysis

Question 5

Qualitative Methods

Answer 5

1. Bottom-up
2. Scenarios
3. Delphi
4. Others

Question 6

Forecast Model

Answer 6

A mathematical way of producing a forecast.

Question 7

Moving Average Forecasts

Answer 7

Underlying idea is that actual sales figure for the next time period will not be very different from recent sales figures.

Uses most recent n data values as a basis for forecasting the next period data value.

Question 8

Moving average based on…

Answer 8

… the fact that as a new observation in the time series is made, it replaces the oldest value in the time series, and a new average is calculated.

Question 9

Forecast Errors

Answer 9

Actual data minus the forecasted data.

Question 10

Mean Squared Error

Answer 10

aka MSE, use this to compare how well one forecasting method does vs. another.

Goal: Minimize the MSE

Method: summing all of the squares of the errors and then calculating average.

Question 11

Weighted Moving Average

Answer 11

Assign weights the preceding data values when calculating moving averages.

Most recent data will get the highest weight, and that weight will decrease for preceding points.

*** only requirement is that the sum of the weights must equal 1.

Question 12

Exponential Smoothing

Answer 12

Forecasting method that is similar to weighted moving averages.

Question 13

Trend Projection and Seasonal Influence

Answer 13

Data that moves upward and downward, or in a seasonal up and down fashion.

Examples: Quarterly sales of bicycles for Company ABC

Trend #1: Sales over 16 qusrters show increase in sales every year
Trend #2: Sales are lowest in 2nd quarter and at a high point in 4th quarter in each year.

Question 14

Fractional Forecasting

Answer 14

Simple, effective way to forecast groups of products.

Forecast total sales of various combined categories, use history to determine appropriate fractions to assign to categories - which will allow you to forecast sub-groups.

Example: Men’s summer suit sales. Total forecasted sales for this year are 400 suits. Last year 12% of those summer suit sales were double-breasted. You can forecast that you will sell close to 48 dbl-breasted suits this summer season.

Question 15

Bottom-up Forecasts

Answer 15

• Method where (in contrast to top-down forecasting) the sales revenue estimates of each product or product line are combined to compute revenue estimate for the entire firm.
• generated in the trenches (sales force, departments)
• these individuals give insight about future demand based on their knowledge of customer history and industry

Question 16

Bottom-up Forecasters :

Answer 16

Bottom-up Forecasters:
1. know the needs of major customers

2. have a history of previous purchases from customers to better understand their purchasing preferences.
3. know about the industry and its trends
4. must know how well customer firm is currently doing and what its future prospects are in order to understand its future purchases and ability to pay.

Question 17

Scenario Analysis

Answer 17

Starts with a carefully crafted set of assumptions concerning future markets for products.
Based on these assumptions forecaster develops appropriate scenarios.
** Method useful for general groups of products, not for specific products

Question 18

Delphi Method

Answer 18

Based on consensus of expert opinions.

Method:

1. A director solicits experts via questionnaire the opinions regarding the marker for a product or group of products individually.
2. Results of questionnaire are tabulated and summarized and resubmitted to the panel of experts in the form of a second questionnaire.
3. Each respondent is asked to reconsider his/her position in light of the answers.
4. Process continues until director reaches sufficient agreement within a relatively narrow band of opinions that her feels reflects the majority of the experts.

Question 19

Qualitative Forecasting (benefit)

Answer 19

Methods make use of human capability to solve messes, that is the problems that are difficult to articulate, let alone solve.

Introduces human element that allows you to interject experience and instinct.