INTRODUCTION TO BUSINESS / ECONOMIC FORCASTING.
There is no new or odd thing about economic forecasts. It has always been very hot topic amongst business experts. They have been working on different strategies to find out the best and accurate way of exact forecasting.
Before there was no distinction between "business" forecasts and "economic" forecasts. Even today, some business experts see no need to differentiate between these two things. But almost everyone in the field understands that business forecasting primarily means to predict about the performance of individual firms or industries. Economic forecasting, on the other hand, is associated with making predictions about the economy of a region or of the entire nation. The distinction between the two types of forecasting is not easy because they share some of the same techniques.
That is the reason it is important and appropriate to touch the some of the economic forecasts as it also influence on the decisions in the business. For a good business it is very much essential that good and in time decision is taken. For that purpose leaders keep on observing market situation and then take decisions for future of their businesses. What are the methods and techniques they use for their decision , there are many theories about it and none of them have proved right so far.
But there are are several assumption about the forecasting.
1. First of all there is no definite way to project any thing completely and accurately and with full certainty. Regardless of the methods that we choose there will always be a possibility of uncertainty and getting wrong until the actual forecast horizon has come into the existence.
2. There are always be blind spots in the forecasts. We are unable to forecast completely new technologies and other things for which there are no existing paradigms.
3. Providing forecasts to policy-makers will help them formulate social policy.
Some of the techniques are mentioned below;
1-Genius technique this technique is based on a person's own guess and it cannot be regarded as scientific method or any other proved method on which hundred percent assumption could be made. it is very much based on one's own personal guess and intuition.
But it has been observed that businessmen have used this technique and got huge success but on the other hand some of the businessmen have also suffered loss as well. The card reading and future predictions are the some of the kind of this type of forecasting. The main problem is the reliance which it does not provide.
2-In the trend extrapolation in this type of forecasting it is believed that the forces who have brought change in the past will continue to operate and will bring about the future change as well, and then mathematic techniques are used for prediction.
Experts assert that this policy can bring about good results in short term forecasts but in long term forcasts it is not reliable. The more we try to forecast for future the more it gets uncertain.
Because the environment continue to change and like people's habits , life style, continue to change and that is the reason more me try to predict for further future its authenticity gets affected.
The stability of the environment is important in this kind of technique.
3-It is Censes method it is method as it is evident from its name that opinion is taken form different experts and each expert is experts in his field of work. The drawback of this technique is the personal beliefs and biases of these experts could influence their opinions.
4-Simulation methods involve using analogs to model complex systems. These analogs can take on several forms.
5-In cross impact matrix method relationships is said to be existed between events and developments that are not revealed by unvaried forecasting techniques. This method recognizes that the happening of an event can also effects the other events. The advantage of this technique is that it forces the policy makers to look at the relationships between system components, rather than viewing any variable as working independently of the others.
It is a forecast that describes a possible course of events. Like the cross impact matrix method, it recognizes the interrelationships of system components. The scenario explains the impact on the other components and the system as a whole. It is a script for defining the particulars of an unknown future.
Scenarios consider events such as new technology, and changing consumer preferences. Scenarios are written as long term predictions of the future.
These trees are of yes and no choices. These trees are the base of computer flow charts. Because of computer technology it is now possible to create lot of complicated trees. Decision theory is based on the concept that an expected value of a seperate variable can be calculated as the average value for that variable.
As it is evident that by name that in this case different forecasts are gathered and then effort is made to make a strong forecast.
Combining forecasts provides us with a way to compensate for deficiencies in a forecasting technique. By selecting complementary methods, the shortcomings of one technique can be offset by the advantages of another.
9-write down sales assumption.
Selling more of your product to an existing customer is far easier than making a first sale to a new customer. So the conversion rates
for existing customers are much higher than those for new customers.
You may want to include details of which product each customer is likely to buy. Then you can highlight potential problems. One product could sell out, while another might not shift at all.
By predicting specific sales, you can forecast what you think will be sold. This is generally far more accurate than forecasting from a target figure and then trying to work out how to achieve it.
The completed sales forecast is not to plan and monitor your sales efforts. It's also a vital part of the cash flow.
THE BUSINESS FOR WHICH I HAD WORKED FOR:-
I worked for a dairy business about 3 years in west London.
The appropriate forecasting method which I will apply is “ combining forecasts” .
Because it gets all the possible forecast on the table and then after considering all the possible forecasts you can come to a definite possible and practible.
For year 1 the cost of new product launch I would estimate is £0.5 million, and this cost includes , more equipment such a trolleys, more machine , more vehicles, more drivers , staff , advertisement etc. The profit of that new product launch is expected after 3 months. As business is already working and it is going to launch a new product it has got basic set up or launching pad. The first year revenue is expected 1.2 million and 2nd year revenue is expected about 1.7 million.
SOURCES OF EXTERNAL FINANCIES;
External sources are related to the finances which are related to the outside the business, like owing or taking money form other businesses , institutions, or individuals.
This kind of thing applies to partnerships and sole traders. It applies where an owner invest some of his own money as a capital in the business.
This kind of money is considered as external source as this money is paid back form business to that owner, and that money may be extra than the money originally paid , because of the help given at that time. Furthermore it either can be short-term source or long-term source depending on the need of the business.
Bank loans are common mean of getting the financial source and it is defined as the external source.
This kind of loan is of two types which is overdraft and loan. Businesses normally have some kind of agreement and understanding with the banks where banks pay them some extra money which the banks pay them back in a short time with some interest.
Whereas bank loan are granted for a long time and often with big amount with more interest to be paid.
Building societies specialise in providing mortgages. Though these building societies differ form the banks but now a day there is very little differences between banks and mortgages. The businesses get money by the way of mortgages and this is also a long time external finances.
Businesses often owe money form other businesses for the services they do for them or the products which they deliver to them.
Sometimes business cant get money from their debtor instantly when they are in need of money so in that case a Factoring company may offer to give their services for debt collection on some charge. This factoring company pays the business most of the money of their debts and then collects the money from its debtors. It is short term source of money.
It is very important external source of finance. A company can issue shares and more it issues the more gets finance and people buying share get more power in the business organisation according to the volume of the share they have.
This is long term finance.
It is the long term finance available to a public limited company and it is given to it by financial institutions.
7- Venture capital;
It is the finance given by individuals who invest in new business and hoping that it will bring them profit for them.
8-Leasing and hire purchase;
It means renting business equipments for finance and this type of finance of can be long-term as well as short-term.
SOURCES OF INTERNAL FINANCIES;
If the business had good trading year is very good internal source of money. It is good because business don't have to take any external source for its needs to meet.
2- Sales of assets:-
Business can generate finance for its new activities , expansions and paying off its debts by selling its part of property , fixtures, machinery or fittings. It is again short term finance.
For that purpose business can consider for sale and lease back policy where it sell its assts and then rent or hire from the business that owns the assets. It is quite expensive strategy where business has to pay more interest but good for getting quick cash for short-time purpose.
Stock of a business can be used for generating finance. Stock can be of many types like raw materials, semi-finished products, finished products. Businesses usually keep large amount of stock in order to meet for sudden demand and sometimes during slowdowns and recession this stock keep on piling up. Business can sell up to get short term finance.
Business normally pay after they receive goods and when they pay in time they tend to build up good relations with their credit. This source of finance appears on balance sheet and delaying the payment for goods and services done can help finances moving .s
VARIOUS COSTS ASSOCIATED WITH OBTAINING FINANCIES;
The most important cost associated with obtaining financies is the interest which a company has to pay untill they pay back the original money they borrowed.
The interest rate gets high with the passage of time and also depend the amount of borrowing.
MAKE A PURPOSAL FOR OBTAINING THE FUNDS;
I intend to run a dairy company which would initially distribute the dairy
Products and I have made quite good research in this regard as how it will get successful. first of all there is not strong competition in the market. Secondly people always want and use these dairy stuff like milk every day. There is not tax on this product by the government as milk has got tax exemption so I will not have to pay heavy taxes.
For intitial start I would need one hundred thousand pounds. The amount will be spent in the following way;
2-vehicles of 3.5 ton = £24000
Rental cold storage for the milk = £12000 for six months.
Bills = £10000 for 6 months
Wages = £4000
Trolleys = £3000
Computer+ stationery+ office equipment = £15000
Initial investment on products = £20000
Other expenses = 15000
The turnover is expected in 2 month time.
The best available option for getting the required investment is bank loan , however the substitute can be the investment by an establish business but it is hard one because the interest rate could be musch higher than the bank loan.
VARIOUS INVESTMENT APPRAISAL TECHNIQUES ALONG WITH ADVANTAGES AND DISADVATAGES:
Investment is one of the very important decision in the business.
Investment is made to gain the profit in future.
While making investment appraisal following ingredients are necessary
1-what are the expected profits.
2- when the expected profits are expected.
3-how long it will take to pay back that investment.
4-what is scale of the investment and can company afford it.
Investment appraisal methods:
One of the most important steps in the capital budgeting cycle is working out if the benefits of investing large capital sums outweigh the costs of these investments. The range of methods that business organisations use can be put one of two ways: traditional methods and discounted cash flow techniques. Traditional methods include the Average Rate of Return (ARR) and the Payback method; discounted cash flow (DCF) methods use Net Present Value (NPV) and Internal Rate of Return techniques.
This is literally the amount of time required for the cash inflows from a capital investment project to equal the cash outflows. The usual way that firms deal with deciding between two or more competing projects is to accept the project that has the shortest payback period. Payback is often used as an initial screening method.
Payback period = Initial payment / Annual cash inflow
So, if £4 million is invested with the aim of earning £500 000 per year (net cash earnings), the payback period is calculated thus:
P = £4 000 000 / £500 000 = 8 years
This all looks fairly easy! But what if the project has more uneven cash inflows? Then we need to work out the payback period on the cumulative cash flow over the duration of the project as a whole.
Payback with uneven cash flows:
Of course, in the real world, investment projects by business organisations don't yield even cash flows. Have a look at the following project's cash flows (with an initial investment in year 0 of £4 000):
The shorter the payback period, the better the investment, under the payback method. We can appreciate the problems of this method when we consider appraising several projects alongside each other.
Arguments in favour of payback
Firstly, it is popular because of its simplicity. Research over the years has shown that UK firms favour it and perhaps this is understandable given how easy it is to calculate.
Secondly, in a business environment of rapid technological change, new plant and machinery may need to be replaced sooner than in the past, so a quick payback on investment is essential.
Thirdly, the investment climate in the UK in particular, demands that investors are rewarded with fast returns. Many profitable opportunities for long-term investment are overlooked because they involve a longer wait for revenues to flow.
Arguments against payback
It lacks objectivity. Who decides the length of optimal payback time? No one does - it is decided by pitting one investment opportunity against another. Cash flows are regarded as either pre-payback or post-payback , but the latter tend to be ignored. Payback takes no account of the effect on business profitability. Its sole concern is cash flow.
It is probably best to regard payback as one of the first methods you use to assess competing projects. It could be used as an initial screening tool, but it is inappropriate as a basis for sophisticated investment decisions.
Average Rate of Return:
The average rate of return expresses the profits arising from a project as a percentage of the initial capital cost. However the definition of profits and capital cost are different by different authors. For instance, the profits may be taken to include depreciation, or they may not. One of the most common approaches is as follows:
ARR = (Average annual revenue / Initial capital costs) * 100
Let's use this simple example to illustrate the ARR:
A project to replace an item of machinery is being appraised. The machine will cost £240 000 and is expected to generate total revenues of £45 000 over the project's five year life. What is the ARR for this project?
ARR = (£45 000 / 5) / 240 000 * 100
= (£9 000) / 240 000 * 100
Advantages of ARR
As with the Payback method, the chief advantage with ARR is its simplicity. This makes it relatively easy to understand. There is also a link with some accounting measures that are commonly used. The Average Rate of Return is similar to the Return on Capital Employed in its construction; this may make the ARR easier for business planners to understand. The ARR is expressed in percentage terms and this, again, may make it easier for managers to use.
There are several criticisms of ARR which raise questions about its practical application:
Arguments against ARR
Firstly, the ARR doesn't take account of the project duration or the timing of cash flows over the course of the project.
Secondly, the concept of profit can be very subjective, varying with specific accounting practice and the capitalisation of project costs. As a result, the ARR calculation for identical projects would be likely to result in different outcomes from business to business.
Thirdly, there is no definitive signal given by the ARR to help managers decide whether or not to invest.
VARIOUS INVESTMENT OPPORTUNITIES AVAILABLE AND CHOOSING THE BEST INVESTMENT OPPORTUNITY.
There are various investment opportunities available depending on the circumstances one can pick one or more at same time.
Stocks: An individual who invests in the stocks of a company is equal to have an ownership stake in that company. That ownership stake in the company is directly proportionate to the number of stocks the person holds. These stocks are also called as shares or equities. A stockholder receives a share of the company's earnings and also get the right to vote in some of the company's major decisions. Investing in stocks must be done with the awareness that there is no guarantee on the returns. So this kind of investment can be risky as well.
Bonds: Bonds are also called debt securities that individuals can buy as well as earn a regular interest income. The investors gets an amount back from the issuer of those bonds. This happens at a time when bonds reach to its maturity . However, the selling price depends on the prevailing market interest rates.
Futures: Futures involves the sale and purchase of an asset, particularly things like , stocks and bonds, at a pre specified price. This type of contract closes on the exchange date that is specified in the agreement. Investing in futures can get huge profits if the market price of the underlying assets slips significantly below the sale price.
Options: Similar to those futures contracts, options are financial agreements that take place between a seller and buyer of an asset. It lets a buyer with an option to purchase an asset at a specified price on a specified date. However, he orshe can choose not to exercise it. The assets under agreement may include stocks, futures and property. This is a platform where one can invest in currencies of various nations. The currency exchange values keeps on fluctuate throughout the day and provide both investors and traders excellent opportunities of making profits.
An investor has numerous investment options to choose from, depending his risk profile and expectation of returns. Different investment options represent a different risk reward trade off. Low risk investments are those that offer assured, but lower returns, while high risk investments provide the potential to earn greater returns. Hence, an investor's risk tolerance plays a key role in choosing the most suitable investment.
Banks today provide a range of investment options, including international investing, investing in commodities, stocks, bonds, precious metals and investment funds. Other options for investing include certificates of deposit, futures and investment clubs.
All investment options have their inherent risk and benefits. For instance, international investing is prone to social, political, economic and currency risks, while fixed income investing is prone to interest risks.
Equities or Shares: The stock market offers the opportunity to enjoy very high returns. However, it also exposes investors to high risk. Having a long term horizon can minimize the risk, since the stock market is volatile in the short term. Investors can either invest in individual companies or across different companies through equity mutual funds, which are managed by professionals and do not require an investor to conduct extensive research.
The best investment opportunity in my view is bond investment, because you get a specified amount after some specified time and also your bonds are protected by government , moreover you can sell them off at any time.
Economic forecasting:state of the art by Elia Kacapyr; 1996
Economic forecasting by V Lewis Bassie Mc Graw-Hill,1958
Economy beyond the millennium by Allan Kirman, offord university press 1999.
Business forecasting in practice: principles and cases by Adolph g,welly 1956.