Forecasting

Forecasting
Itwouldbeveryhelpfultodecisionmakersiftheyhad
anideaofwhatislikelytohappeninthefuture.
Itispossibletoforecastusinghistoricalnumericaldata,
e.g.salesfigures
ThisisknownasTIMESERIESANALYSIS

BusinessStudiesOnline:Slide1

Time-Series Analysis
Analysis
Thereare4stagesinvolvedincarryingouttime
seriesanalysis:
1)Identifyingthetrend
Thisisthemostimportantaspect,andrequiresbusinesses
toidentifywhathasbeenhappening.

2)Identifyingvariations
Recessionsandboomswithintheeconomywillaffectmany
typesofbusinessdata,andthusmustbeaccountedfor.

3)Identifyingseasonal/cyclicalvariations
Somebusinessesareseasonalinnature,iesalesarehigher
insummer.Thesemustalsobeaccountedfor.

4)Acceptingrandomvariations
freakeventsdooccur,andwillaffectbusinesses.E.g.
September11th2001.

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1) Identifying The Trend

Trend
Timeseriesanalysisisbasedonhistoricaldata
Managersmustidentifywhetherthedatashowsa
generallyupward,downward,orconstanttrend
Rawdata,though,maymakethisverydifficult
e.g.canyouidentifythetrendinthesalesfiguresgivenbelow?
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Year
Sales(m) 67 70 64 61 59 66 73 69 64 63 69 75 72

Tohelpthemtodothisbusinesseswillsmoothoutthe
rawdatabyusingMOVINGAVERAGES
Themovingaverageisusuallyeither3periodor4period,
dependinghowoftentheaverageistaken.

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An Example 3 Period Moving Average

Average
The3periodmovingaverageisfoundbyaddingupevery
3piecesofdata,anddividingby3tofindtheaverage.
Usingthepreviousdata,wewouldcalculateasfollows:
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005

Sales
(m)
67
70
64
61
59
66
73
69
64
63
69
75
72

3Point
Total

3Point
Moving
Average

201
195
184
186
198
208
206
196
196
207
216

67.00
65.00
61.33
62.00
66.00
69.33
68.67
65.33
65.33
69.00
72.00

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A Graphical Representation
Representation
Itisthenpossibletoplotboththeoriginalandtrenddata,
toseehowthedatahasbeensmoothedout:

80.00
3Point
Moving
Average
Sales
(m)

70.00
60.00

05

20

03
20

01
20

99
19

97
19

95
19

93

50.00

19

Sales(m)

TimeSeriesAnalysis:
3PointMovingAverage

Year

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An Example 4 Period Moving Average

Average
A4periodmovingaverageisoftenusedbecauseit
smoothesthedataoutfurther
The4periodmovingaverageismorecomplex,sinceno
oneperiodisthecentreperiod.
ThesolutionistouseCENTRING
Centringrequiresthecalculationofthe4and8yearmovingtotals
inordertofindamidpoint.
Itisthennecessarytofindtheaveragebydividingthetotalsby8

Usingthepreviousdata,wewouldcalculatethe4period
movingaverageasfollows:

BusinessStudiesOnline:Slide6

Year
1993

Sales
(m)
67

1994

70

4Point
Total

8Point
Total

4Point
Moving
Average

516

64.50

504

63.00

509

63.63

526

65.75

539

67.38

541

67.63

534

66.75

536

67.00

550

68.75

262
1995

64
254

1996

61
250

1997

59
259

1998

66
267

1999

73
272

2000

69
269

2001

64
265

2002

63

An Example
4 Period
Moving
Average
Average
Ifrequiredthisdata
couldalsobe
showngraphically

271
2003

69
279

2004

75

2005

72
BusinessStudiesOnline:Slide7

Forecasting From the Trend

Trend
Havingcalculatedthetrend,andillustrateditgraphically,
itisasimplematterofdrawingalineofbestfit,and
extendingittoforecastfuturefigures.
Eg,usingourearliergraph:

20
00

19
98

19
96

19
94

19
92

19
90

80.00
75.00
70.00
65.00
60.00
55.00
50.00
19
88

Sales(m)

TimeSeriesAnalysis:
3PointMovingAverage

Lineof
BestFit

3Point
Moving
Average
Sales
(m)

Itisthena
simplecaseof
takinga
readingfrom
thelineofbest
fittoobtaina
futureforecast

Year

BusinessStudiesOnline:Slide8

The Variations
Variations
Areadingfromthelineofbestfitisunlikelytobeaccurate
becauseitdoesnotconsidervariationsinthedata,e.g.
rawdataisrarelyplottedasastraightline!
Inordertoaccountforthese,andobtainmoreaccurate
forecastsitisnecessarytocalculatethevariation.
Thisiscalculatedusingtheformula:
Variation=ActualDataTrendData

BusinessStudiesOnline:Slide9

Calculating The Variations

Variations
Thevariationsofourearlier3periodmovingaverage
examplewouldbe:
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Sales
(m)
67
70
64
61
59
66
73
69
64
63
69
75
72

3Point
3Point Moving
Total Average Variation
201
195
184
186
198
208
206
196
196
207
216

67.00
65.00
61.33
62.00
66.00
69.33
68.67
65.33
65.33
69.00
72.00

3.00
1.00
0.33
3.00
0.00
3.67
0.33
1.33
2.33
0.00
3.00

BusinessStudiesOnline:Slide10

The Average Variation

Variation
Havingcalculatedthevariationsitisnecessarytoadd
themtogether,beforedividingbythenumberofvariations.
Thiswillgiveustheaveragevariation
Cyclical
Variation

Inourexampletheaveragevariationwouldbe:
2.00/11=0.182Million
=182,000units

Thismeansthatanyreadingobtainedfroma
lineofbestfitwouldhave182,000unitsadded.
Intheorythisshouldyieldamoreaccurate
forecast

3.00
1.00
0.33
3.00
0.00
3.67
0.33
1.33
2.33
0.00
3.00
2.00

BusinessStudiesOnline:Slide11

The Seasonal Variation

Variation
Manybusinesseswillsellproductsthatsellbetteratsome
timesoftheyearthanother. ietheyhaveseasonal
products
Inthiscaseitisoftenbettertocalculatetheseasonal
variation(sometimescalledcyclical)ratherthanthe
variation
Takeanexampleofanicecreamcompany,whosesales
aregivenbelow
Thefirststepistocalculatea4periodmovingaverage
2002
2003
2004
2005
Year
2 3
4 1
2
3 4
1 2
3 4
1 2
3 4
Quarter 1
Sales
(000s) 120 140 190 130 130 160 220 160 130 170 240 170 160 190 250 180

BusinessStudiesOnline:Slide12

Calculating The Seasonal Variation

Variation
Thetrendandvariationforthisdatawouldbeasfollows:
Year
Quarter
2002
1
2
3
4
2003
1
2
3
4
2004
1
2
3
4
2005
1
2
3
4

Sales
4Point
(000s)
Total
120
140
580
190
590
130
610
130
640
160
670
220
670
160
680
130
700
170
710
240
740
170
760
160
770
190
780
250
180

4Point
8Point Moving
Total Average Variation

1170
1200
1250
1310
1340
1350
1380
1410
1450
1500
1530
1550

146.25
150.00
156.25
163.75
167.50
168.75
172.50
176.25
181.25
187.50
191.25
193.75

43.75
20.00
26.25
3.75
52.50
8.75
42.50
6.25
58.75
17.50
31.25
3.75

Theaverage
seasonal
variationisthen
calculatedby
addingupthe
figuresfor
corresponding
quarters,and
dividingbythe
numberof
piecesofdata

BusinessStudiesOnline:Slide13

Using The Seasonal Variation

Variation
Theseasonalvariationforeachquarterwouldbeas
follows:
Quarter1
(26.25+42.5+31.25)/3=33.33
Soallforecastsforquarter1wouldhave33,330subtractedfromthem

Quarter2
(3.75+6.25+3.75)/3=4.58
Soallforecastsforquarter2wouldhave4,580subtractedfromthem

Quarter3
(43.75+52.5+58.75)/3=51.67
Soallforecastsforquarter3wouldhave51,670addedtothem

Quarter4
(20+8.75+17.5)/3=15.42
Soallforecastsforquarter4wouldhave15,420subtractedfromthem
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Advantages of Using Time Series Analysis

Analysis
Itisusefulforidentifyingseasonalvariations,whichcan
helpplanningatdifferenttimesoftheyear
Itcanbereasonablyaccurateintheshorttermifthefirm
isinastableenvironment
Thelineofbestfitcanbedrawnquitecorrectlyinvarying
positions(somewouldsaythisisadisadvantage!)

BusinessStudiesOnline:Slide15

Disadvantages of Using
Time Series Analysis
Analysis
Itisalongwinded,andcomplexprocess,particularlyif4
periodmovingaveragesareused
Historicaldataisnotalwaysagoodindicationofwhat
mighthappeninthefuture
Itisnotveryusefulforlongtermforecasting

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