Purpose of Forecasting Demand in a Business Firm

An accurate demand forecasting is essential for a firm to enable it to product the required quantities at the right time and arrange well in advance for the various factors of production (raw materials, equipment, machine accessories, labour, building, etc.). It helps a firm to assess the probable demand for its products and plan its production accordingly. In
fact, forecasting is an important aid in effective and efficient planning. It is also helpful in better planning and allocation of national resources.

The purpose of demand forecasting refers the estimation of volume of production; price of the commodity either short-run as well as long term forecasting.

Under the short-run purposes of forecasting, following heads included:

1. Purpose of Short-Term Forecasting

  • Appropriate production scheduling so as to avoid the problem of over-production and the problem of short supply. For this purpose, production schedules have to be geared expected sales.
  • It helps the firm in reducing price policy so as to avoid an increase when the market conditions are expected to be weak and a reduction when the market is going to be strong.
  • Determining appropriate price policy so as to avoid an increase when the market conditions are expected to be weak and a reduction when the market is going to be strong.
  • Setting sales targets and establishing controls and incentives. If targets are set too high, they will be discouraging sales-man who fails to achieve them, if set too low, the targets will be achieved easily and hence incentives will prove meaningless.
  • Evolving a suitable advertising and program.
  • Forecasting short-term financial requirements. Cash requirements depend on sales level and production operations. It takes time to arrange for funds on reasonable terms. Sales forecasts will, therefore, enable arrangement of sufficient funds on reasonable terms well in advance.

2. Purposes of Long-Term Forecasting

  • Planning of a new unit or expansion of an existing unit, it requires an analysis of the long-term demand potential of the products in question. A multi-product firm must ascertain not only the total demand situation, but also the demand for different items separately. If the company has better knowledge that its rivals of the growth trends of the aggregate demand and of the distribution of the demand over various products, its competitive position would be much better. 
  • Planning long-term financial requirements. As planning for raising funds requires considerable advance notice, long-term sales, forecasts are quite essential to assess long-term financial requirements.
  • Planning manpower requirements. Training and personnel development are long-term propositions, taking considerable time to complete. They can be started well in advance only on the basis of estimates of manpower requirements assessed according to long-term sales forecasts.
Most of modern firms forecast their demand on the basis of past demand, present condition of demand. Business/ Demand forecasting is the prediction of future situation for a firm’s product in the market.

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