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# FORECASTING

History - 19 th Century Eg: Regression Analysis Types of Forecasting Micro Forecasting Macro Forecasting

Different

## Inherent inaccuracy Atmosphere of Uncertainty Immediate Strategies Decision Making

Forecasting Procedures

More Qualitative No over Manipulation only judgements More Quantitative No judgements , mechanical procedures

## Computer Forecasting Packages

Statistical Packages includes time serious and regression analysis Eg.SAS packages with forecasting tools with Minitab,Eviews Forecasting Packages Eg. Crystal Ball (CB), Predictor and Forecasting

Forecasting Steps

Problem Formulation Data Manipulation Model Building and Evaluation Model Implementation Forecasting Evaluation

## Characteristics of Data Information

Objective- Need, Collection and Reliable Collection of Date Primary Sources Collected directly Secondary Sources Already exist Random Sample Portion of Whole

Types of Date

Cross section data Needs particular point of time Time Series data Periodical basis

Types of Variables information about an item which takes many possible values Qualitative Variable Not measurable

## Quantitative Variable measurable and illustratable in numerical quantities

Scales of Measurement

Nominal Scale No natural Order take placeOrdinal Scale use for ranking taxonomies Cardinal Scale - Physical Measurement -ratios scales Interpretation Stick with objective Fair evidence Differentiate the opinion and fact

Basic Statistical Concepts Mean Average x = x /n Median - take the middle value when the data is in ascending order Quartiles - procured from the order data by looking at positions a quarter and three quarter of the way Lower Quartile = (n+1) /4 Upper Quartile = 3(n+1) /4 Mode - Acquired by monitoring the value with the highest frequency Range: difference between the highest and lowest

Basic Statistical Concepts Inter-quartile range Difference between the upper Quartile and lower Quartile Variance= (x- x ) / n-1 Standard deviation = square root of the variance Coefficient of variation = ratio of the standard deviation to the mean : = Standard deviation / Mean

Time Series Data on the same item collected at regular time intervals E.g

## Annual time serious data - collected every year /early basis

Non-monetary time series data - Any data items except money E.g The total number of underground journeys An appropriate graph for time series data is a line chart. Percentage Change = Year 2 Year1 /year 1 X100 % Percentage change between 2000 and 2001 will be calculated as follows

## 953 -967 / 967 X 100 = -14 / 967 X 100 = --1.4 %

Index numbers When time serious data follow an upward or downward trend, it is suitable enough to know the percentage changes from a particular "interesting" year

## Index (2001) = 22896 /22373 X100 = 102.3

Monetary time series data Time series data related to money value Series based on current prices not considering inflation Example: Year 2002 2003 2004 2005 Exp 368.70 383.25 402.30 416.35 Based on Y 2005 432.50 424.10 420.48 416.35 Series based on constant prices - considering inflation

## Deflating a series based on current prices

In order to transform the series based on current prices into a series based on constant prices, we need to divide it by the rate of inflation or RPI Exp ( 2002) = Exp 2002 / RPI 2002 X 100 = 368.70 / 85.24 X1 00 =432.50

## Quarterly Time Serious Date Data collected in quarter

Quarterly time periods are Q1-Quarter 1 January March Q2- Quarter 2 April June Q3 Quarter 3 July September Q4 Quarter 4 October December Quarterly time serious displays two major components 1. Trend- Common movements of the annual block 2. Seasonality Consistent movements within the annual blocks Eg: The following graph show the number of tourists Visit to Turkey from U.K

Predicting the Trend Moving Average (MA) Average of four consecutive quarter data Centred Moving Average (CMA) Average of two consecutive moving averages

## Predicting the Trend

Liner Regression Equation is

## Trend = 96.829 X QN + 415.52

First Quarter of 2010 will be represented by a quarter number 25 Trend (Q1, 2010)= 96.829 X 25 + 415.52 = 2933.074m Trend (Q2, 2010) = 96.829 X 26 + 415.52 = 2933.903m

Predicting the Seasonality Calculate the Seasonal factor - Dividing the actual expenditure by centred moving average Seasonal Factor = Actual Quarterly Data / CMA

Predicting the seasonal factor For the quarter 4 Select the best one which represents the quarter.
Seasonal Factor (Q 4) = 1.279+1.259+1.211 + 1.279+ 1.309 5 = 1.2674

Adjusted Seasonal Factor = To use the average seasonal factors as best representation of the different quarters, should add up to 4

## Adjusted Factor = 3.986-4 = 0.0036 4

A.S.Factor (Q1) = 0.945-0.0036 = 0.948 A.S.Factor (Q2) = 0.862 -0.0036 = 0.865 Year 2010 Quart. N Q1 Q2 Q3 Q4 Trend 2836.245 2933.074 3029.903 3126.732 Seasonal factors 0.948 0.865 0.915 1.271

Predictions Quarterly.
Prediction (Q1) = 2836.245 X 0.948 = 2688.760 = 2.69 bn Prediction (Q2) = 2933.074 X0.865 = 2537.109 = 2.54 bn Prediction (Q3) = 3029.903 X 0.915 = 2772.361 = 2.7 bn Prediction (Q4) = 3126.732 X1.271 = 3974.763 = 3.97 bn

## Liner regression Analysis A liner Equation (Straight Line)

y= bx+ a
Straight Line Upwards / Positive Downwards / Negative

## Turnover = 2.4623 XLabour cost + 570.21

B= nxy x X y nx (x) A = y b X x n Interpretation of Regression Coefficients

## Linear function in Finance Applications

One to One relationship between two variables in a equation form

## y = a + b x (y and x are variables ) y =12 + 3 x y=5-3x y = -11.6 + 0.1 x

A - intercept, b - gradient.

Quantity produced - number of orders for goods received each week The basic cost - weekly fixed costs covering such items as rent, bills, stationary items and etc Unit cost - cost of assembling the ordered good which includes the cost of the parts The weekly total cost will be calculated as per to the following formula Total cost = Basic cost + Unit cost X quantity Example for First week Total cost = 24939 + 30350 = 24939 +15150 = 40,089

## Cost Volume Analysis

Cost represent the resources that have to be sacrificed to achieve a business objective Fixed Cost Cost remains same irrespective of the volume activity Stepped Fixed Cost - Change after a certain amount of Volume increase

Variable Cost Costs which vary with volume activity Semi Fixed / Semi variable cost Comprises of fixed and variable cost elements Total Cost = Fixed Cost + Variable Cost

Break even Point Total Sales Revenue = Total Cost Total Sales Revenue = Fixed Cost +Total Variable Cost Total Sales Revenue = Quantity X Sales revenue Per unit Total Variable Cost = Quantity X Variable Cost per Unit

## Calculating the BEP

Number of units output at BEP is Q1 Q1 X Sales Revenue per unit = Fixed Cost + (Q1 X Variable Cost per unit (Q1 X Sales revenue per Unit) Q1 X Variable cost per unit) = Fixed Cost Q1 ( Sales revenue per unit Variable cost per unit) = Fixed Cost

## Contribution Margin =/Contribution = Sales Revenue Variable costs per unit

Fixed Cost BEP in Units = --------------------------------------Contribution Margin per unit

## Sales Required to Achieve the Target Operating Income

Break Even Formula could be adjusted to show the sales volume required to generate any amount of operating income

## Fixed Cost + Target Income

BEP in Units = --------------------------------------Contribution Margin per unit Fixed Cost + Target Income --------------------------------------Contribution Margin Ratio

BEP in Dollars =

A Company sells Product M at the price of 10.00 per unit. The fixed cost is 25,000 and variable cost per unit is 7.50. Q1). How many Units must be sold to achieve the Break Even ? Q2) What is the amount of sales revenue company M should have to achieve the Break even Q 3) How many nits must be sold to generate the Operating in come of 5000

Margin of Safety The difference between the Actual volume of out put sales and the Sales at the Break Even Point Operating Gearing