April 30, 2012

MB0040 [STATISTICS FOR MANAGEMENT] Set1 Q4

Q4. a. Explain the characteristics of business forecasting.
b. Differentiate between prediction, projection and forecasting.


4(a)Characteristics of business forecasting 

Based on past and present conditions 
Business forecasting is based on past and present economic condition of the business. To forecast the future, various data, information and facts concerning to economic condition of business for past and present are analysed. 

Based on mathematical and statistical methods 
The process of forecasting includes the use of statistical and mathematical methods. By using these methods, the actual trend which may take place in future can be forecasted.
Period 
The forecasting can be made for long term, short term, medium term or any specific period. 

Estimation of future 
The business forecasting is to forecast the future regarding probable economic conditions. 

Scope 
The forecasting can be physical as well as financial.


4(B). A prediction is a statement about the way things will happen in the future, often but not always based on experience or knowledge. While there is much overlap between prediction and forecast, a prediction may be a statement that some outcome is expected, while a forecast may cover a range of possible outcomes. Prediction is closely related to uncertainty. Reference class forecasting was developed to eliminate or reduce uncertainty in prediction.

“Forecasting aims to tell of events before they happen. It differs from prediction in that it looks to the future, where as prediction may not (as in a successful reconstruction of some past outcome). Further, forecasting differs from explanation, having the goal of predicting an outcome, rather than the goal of theorising about outcomes. “

A financial projection consists of prospective financial statements that present, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a “what if?” scenario.


The key difference between a forecast and a projection is the nature of the assumptions. In a forecast, the assumptions represent the company's expectations of actual future events. A projection is used when the assumptions desired are not those believed to be most likely (essentially, the "what if?" scenario).

(b) Prediction, projection and forecasting
A great amount of confusion seem to have grown up in the use of words ‘forecast’, ‘prediction’ and ‘projection’.

Forecasts are made by estimating future values of the external factors by means of prediction, projection or forecast and from these values calculating the estimate of the dependent variable. 


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