# What are the three methods of forecasting?

There are 14 forecasting method which can be applied to business situations. These various types are further categorized into quantitative and qualitative methods. Qualitative forecasting method is a subjective judgment based on the opinion expressed by consumers and market experts. This method is adopted when there is no historical data. On the other hand, quantitative forecasting method is engaged where there is access to historical data and unlike the former; it is objective to the degree of the reality of the data. They are presented below.

## Quantitative Forecasting Methods

Moving Average. This is a time series method which involves a calculation to examine data points by creating an average series of various subsets from complete data. The formula involves a series of number and fixed subset size. The forecaster takes the average of the formerly fixed subset and then modifies it by taking out the first number of the series and adding the value that follows in the subset series. This method is statistical and it is usually adopted to deal with fluctuations only continuing for a short-term, technical analysis of financial data, evaluation of GDP, among others.

Exponential Smoothing. This is a simple method adopted to measure some determinations using existing assumptions by the user, such as seasonality. Using an algorithm that uses past data, the future is predicted. When compared to some other smoothing methods, it produces an easy result without requiring any minimum number of observations.

Regression Analysis. This covers a group of methods for forecasting that is dependent on information gathered from other variables (dependent and independent). Largely, it depends on the ability to use data generating process. There is simple linear regression which involves comparing an independent variable with a dependent variable and there is multiple linear regressions in which two or more independent variables are compared with one dependent variable.

Adaptive Smoothing. This method allows a business firm to key into different variables in order to arrive at every likely result from a particular business action or resolution. Statistical data and variable analysis are involved as well. It is common in firms without obvious quantities.

Graphical methods. This involves a statistical method but it is simple and useful for the sales forecast. With this method, periodic sales data for various years can be illustrated graphically with meeting points established by drawing free-hand lines. Based on the graph, the distance between points and line determines the minimum.

Econometric modeling. This is an improvement on regression analysis. It involves the calculation of independent regression under equation, variables and data. Meanwhile, it is economic theories that are adopted in the statistical method to determine the influence of one economic variable on another.

Life-cycle modeling. This method analyses and forecast the growth and development rates of a new product. The model brings together data that have been subjected to acceptance or rejection by different market groups such as creators, early and late adopters, early and late majority. It is the result that is used in forecasting sales for a new product.

## Qualitative Forecasting Methods

All of the methods that will be discussed below are after the same goal- to forecast a useful market reception of a product. The forecasting will help to make a useful decision on the quantities to the produced and even distributed across the market one step at a time. Also, it will help to inform other decisions like budgeting, capital investment, and management of inventory.

Expert opinion. Here, the opinions of experts in the area where the forecast is to be made are weighed in order to make meaningful projections. It does not depend on statistical data hence it can be done where measurable data is lacking. This method is easy and quick and the team usually adjusts the result of the projection to their anticipation.

Market Research. It is possible for a business firm to carry out market research that will enable its sales forecast. This method may be executed by the staff members of the firm or another organization, research firm, which it has been outsourced to. Whichever way, market research could involve strategies which include telephone, opinion poll or personal interviews and questionnaires.

Focus groups. This is a popular qualitative forecasting method. It involves engaging about five to ten people from a business firm’s target customers in an open-ended discussion. Usually, there is a moderator who sees to turn-taking among the participants and also asks questions related to their perception of the brand, products, slogans, design and related concepts. It is expected that participants will provide insightful responses which represent the opinion of a larger market it targets. Focus group discussions may involve incentives like a financial reward or any equivalent measure in terms of free good items.

Historical analogy. This is a forecasting method in which a sales history of a product having a parallel relationship with a present product is studied to predict future sales. It can be utilized to predict the market reception for a new product or group of products. This is done by using the historical data gathered over a period of time from a similar existing product either by the company or a formidable competitor.

Delphi method. This is a forecasting method in which market orientation and judgments of a small group of experts are combined using a function of iteration. The results of these iterated combinations help to develop the next parallel meeting points in order to discover an accurate forecast. Mind you, the opinions of the experts are gathered individually in order to avoid the influence of the opinion of a dominating personality if it were to be a group discussion method. Rather, an outsourced party handles opinions gathering; summarizes and bring them before the same experts. New questions may be attached to it and the circle continues until a meeting point is arrived at. This method has proved effective and dependable for long-term forecasting.

Panel consensus. This method brings together members of a business firm across all levels to establish its forecast. It is an open process that allows all the participants to express themselves. Since it usually includes participants from the low level of the organisation’s hierarchy to superiors, there may be feelings of intimidation and suppression of opinions on the part of the former. For example, a sales manager who actually understands the market well may feel reluctant to contradict the opinions expresses by top managers like president and vice-president. In the end, the process of a panel consensus may not be truly open, fair and reliable.

Whilst the above traditional forecasting methods are tried and tested for decades, but they are now challenged and upgraded by modern forecasting methods using Machine Learning and Artificial Intelligence.

In Conclusion

Forecasting is a tool that helps management to deal with the fluctuating market. With reliable historical data or opinions of the expert, a business firm will be able to predict future trends that can be manipulated to make the market work in their favor. The various forecasting methods available are categorized into quantitative and qualitative.

Meanwhile, it should be noted that there is no strict rule on the use of any forecasting method. If need be, it can be adjusted to the particular need of a business firm. Also, two or more forecasting methods can be adopted at a time by a business.

### What are the 3 most important components of forecasting?

Elements of Forecasting:.
James W. Redfield has summarized the essential elements as follows:.
Developing the ground work:.
Comparing actual with estimated results:.
Refining the Forecast Process:.

### What are the 2 main methods of forecasting?

There are two types of forecasting methods: qualitative and quantitative. Each type has different uses so it's important to pick the one that that will help you meet your goals.

### What is the most common method of forecasting?

#1 Straight-line Method The straight-line method is one of the simplest and easy-to-follow forecasting methods. A financial analyst uses historical figures and trends to predict future revenue growth.

### What are the five forecasting methods?

Techniques of Forecasting:.
Simple Moving Average (SMA).
Exponential Smoothing (SES).
Autoregressive Integration Moving Average (ARIMA).
Neural Network (NN).
Croston..