UNIT 3 - BUSINESS FORECASTING

What are important business forecasting methods?

There are several business forecasting methods. They fall into two main approaches:

 Quantitative forecasting
 Qualitative forecasting

Quantitative and qualitative forecasting techniques use and provide different sets of data and are
needed at different stages of a product's life cycle.

Quantitative business forecasting

Use quantitative forecasting when there is accurate past data available to analyze patterns and
predict the probability of future events in your business or industry.

Quantitative forecasting extracts trends from existing data to determine the more probable
results. It connects and analyzes different variables to establish cause and effect between events,
elements, and outcomes. An example of data used in quantitative forecasting is past sales
numbers.

Quantitative models work with data, numbers, and formulas. There is little human interference in
quantitative analysis. Examples of quantitative models in business forecasting include:

The indicator approach: This approach depends on the relationship between specific indicators
being stable over time, e.g., GDP and the unemployment rate. By following the relationship
between these two factors, forecasters can estimate a business's performance.

The average approach: This approach infers that the predictions of future values are equal to
the average of the past data. It is best to use this approach only when assuming that the future
will resemble the past.

Econometric modeling: Econometric modeling is a mathematically rigorous approach to

forecasting. Forecasters assume the relationships between indicators stay the same and test the
consistency and strength of the relationship between datasets.

Time-series methods: Time-series methods use historical data to predict future outcomes. By
tracking what happened in the past, forecasters expect to get a near-accurate view of the future.

Qualitative forecasting

Qualitative business forecasting is predictions and projections based on experts' and customers'
opinions. This method is best when there is insufficient past data to analyze to reach a
quantitative forecast. In these cases, industry experts and forecasters piece together available data
to make qualitative predictions.
Qualitative models are most successful with short-term projections. They are expert-driven,
bringing up contrasting opinions and reliance on judgment over calculable data. Examples of
qualitative models in business forecasting include:

Market research: This involves polling people – experts, customers, employees – to get their
preferences, opinions, and feedback on a product or service.

Delphi method: The Delphi method relies on asking a panel of experts for their opinions and
recommendations and compiling them into a forecast.

How do you choose the right business forecasting technique?

Choosing the right business forecasting technique depends on many factors. Some of these are:

 Context of the forecast

 Availability and relevance of past data
 Degree of accuracy required
 Allocated time to conduct the forecast
 Period to be forecast
 Costs and benefits of the forecast
 Stage of the product or business needing the forecast

What are the integral elements of business forecasting?

While there are different forecasting techniques and methods, all forecasts follow the same
process on a conceptual level. Standard elements of business forecasting include:

Prepare the stage: Before you begin, develop a system to investigate the current state of
business.

Choose a data point: An example for any business could be "What is our sales projection for
next quarter?"

Choose indicators and data sets: Identify the relevant indicators and data sets you need and
decide how to collect the data.

Make initial assumptions: To kickstart the forecasting process, forecasters may make some
assumptions to measure against variables and indicators.

Select forecasting technique: Pick the technique that fits your forecast best.

Analyze data: Analyze available data using your selected forecasting technique.

Estimate forecasts: Estimate future conditions based on data you've gathered to reach data-
backed estimates.
Verify forecasts: Compare your forecast to the eventual results. This helps you identify any
problems, tweak errant variables, correct deviations, and continue to improve your forecasting
technique.

Review forecasting process: Review any deviations between your forecasts and actual
performance data.

Business forecasting examples

Some forecasting examples for business include:

 Calculating cash flow forecasts, i.e., predicting your financial needs within a timeframe
 Estimating the threat of new entrants into your market
 Measuring the opportunity of developing a new product or service
 Estimating the costs of recurring bills
 Predicting future sales growth based on past sales performance
 Analyzing relationships between variables, e.g., Facebook ads and potential revenue
 Budgeting contingencies and efficient allocation of resources
 Comparing customer acquisition costs and customer lifetime value over time

What are the limits of business forecasting?

You can follow the rules, use the right methods, and still get your business forecast wrong. It is,
after all, an attempt to predict the future. Some limits to business forecasting include:

 Biases and errors by the forecasters or managers

 Incorrect information from employees, experts, or customers
 Inaccurate past numbers
 Sudden change in market conditions
 New industry regulations

Predictive analytics

Predictive analytics looks at current and historical data patterns to determine

if those patterns are likely to emerge again .

https://www.simplilearn.com/what-is-predictive-analytics-article
What is Predictive Analytics?

Predictive analytics is a significant analytical approach used by many firms to assess

risk, forecast future business trends, and predict when maintenance is required. Data
scientists use historical data as their source and utilize various regression
models and machine learning techniques to detect patterns and trends in the data.

he basic goal of predictive analytics is to forecast what will happen in the future with a high
degree of certainty. This distinguishes predictive analytics from descriptive analytics, which
assists analysts in analyzing what has previously occurred, and prescriptive analytics, which
uses optimization techniques to detect optimal solutions to address the trends revealed by
predictive analytics.

Examples of Predictive Analytics

Predictive analytics is used in a wide variety of ways by companies worldwide. Adopters from
diverse industries such as banking, healthcare, commerce, hospitality, pharmaceuticals,
automotive, aerospace, and manufacturing get benefitted from the technology.

Here are a few examples of how businesses are using predictive analytics:

 Customer Service

Businesses may better estimate demand by utilizing advanced and effective analytics and
business intelligence. Consider a hotel company that wants to estimate how many people will
stay in a certain area this weekend so that they can guarantee they have adequate employees and
resources to meet demand.

 Higher Education

Predictive analytics applications in higher education include enrollment management,

fundraising, recruiting, and retention. Predictive analytics offers a significant advantage in each
of these areas by offering intelligent insights that would otherwise be neglected.

1. A prediction algorithm can rate each student and tell administrators ways to serve students during
the duration of their enrollment using data from a student's high school years.
2. Models can give crucial information to fundraisers regarding the optimal times and strategies for
reaching out to prospective and current donors.

 Supply Chain

Forecasting is an important concern in manufacturing because it guarantees that resources in a

supply chain are used optimally. Inventory management and the shop floor, for example, are
critical spokes of the supply chain wheel that require accurate forecasts to function.

Predictive modeling is frequently used to clean and improve the data utilized for such estimates.
Modeling guarantees that additional data, including data from customer-facing activities, may be
consumed by the system, resulting in a more accurate prediction.

 Insurance

Insurance firms evaluate policy applicants to assess the chance of having to pay out for a future
claim based on the existing risk pool of comparable policyholders, as well as previous
occurrences that resulted in payments. Actuaries frequently utilize models that compare
attributes to data about previous policyholders and claims.

 Software Testing

Predictive analytics can help you enhance your operations throughout the full software testing
life cycle.

Simplify the process of interpreting massive volumes of data generated during software testing
by using that data to model outcomes. You can keep your release schedule on track by
monitoring timelines and utilizing predictive modeling to estimate how delays will affect the
project. By identifying these difficulties and their causes, you will be able to make course
corrections in individual areas before the entire project is delayed.

Predictive analytics can assess your clients' moods by researching social media and spotting
trends, allowing you to anticipate any reaction before it occurs.

So far we discussed what is Predictive analytics and its examples. Moving forward, lets
understand what are its analytics tools.

Predictive Analytics Tools

Predictive analytics tools use data to help you predict the future. Instead, it informs you of the
probability of various scenarios. Knowing these possibilities might assist you in planning various
parts of your business.

Predictive analytics is a subset of data analysis. Descriptive analytics, which helps you determine
what your data represents, is another part of data analytics. Diagnostic analytics identify the root
reasons for what has occurred. Prescriptive analytics is more similar to predictive analytics. This
provides you with actionable advice for making better selections.

In other words, predictive analytics lies between data mining, which searches for patterns, and
prescriptive analytics, which instructs you what to do with this knowledge. Below is a list of the
most popular Predictive Analytics Tools used in the industry.

 SAS Advanced Analytics

SAS is the global leader in analytics, with a plethora of various predictive analytics products
offered. The list is so broad that it may be difficult to determine which tool(s) you will require
for your specific needs. In addition, the firm does not give upfront pricing, making it difficult to
compare prices. Nonetheless, with so many different tools available, chances are SAS offers just
what you want.

 IBM SPSS

IBM SPSS (Statistical Package for the Social Sciences) is a data modeling and statistics-based
analytics program. The software can handle both organized and unstructured data. To meet any
security and mobility requirements, this software is offered in the cloud, on-premises, or via
hybrid deployment.

 RapidMiner Studio

RapidMiner Studio blends data preparation and analysis with unique business implementation.
You may use this code optimal application to automate reporting based on time intervals or to
have events trigger changes in your visualizations.

 TIBCO Spotfire

TIBCO Spotfire includes a variety of tools for working with large data sets. Spotfire is simple
enough for anybody to utilize when it comes to predictive analytics. Spotfire includes a feature
known as one-click predictions. These are pre-programmed methods for classifying and
clustering data.
It also displays relationships and forecasts. Spotfire features an attractive data display. It is
always constantly reading data and updating in real-time. It is simple to create your apps for use
with the platform. Spotfire's machine learning algorithms get a greater in-depth understanding.

 H2O

If you're looking for an open-source predictive analytics solution, H2O should be at the top of
your list. It provides quick performance, low cost, superior features, and great flexibility. The
H2O dashboard provides excellent visualization of data insights.

This tool, however, is designed for experienced data scientists rather than citizen data scientists.
If you've invested in training, this may be a useful tool.

So far we discussed what is Predictive analytics, examples and its types in detail. Moving
forward, let’s understand what are its techniques

Predictive Analytics Techniques

Predictive analytics incorporates a variety of data analysis approaches, including data mining,
machine learning, and others. The following are the techniques used in predictive analytics:

 Decision Trees

A decision tree is an analytics methodology based on Machine Learning that uses data mining
algorithms to forecast the potential risks and benefits of undertaking certain options. It is a visual
chart that resembles an upside-down tree that depicts the prospective result of a decision. When
used for analytics, it can solve all forms of classification problems and answer difficult issues.

 Neural Networks

Neural networks are biologically inspired data processing systems that use historical and present
data to forecast future values. Their architecture allows them to identify complicated connections
buried in data in a way that replicates the pattern detecting systems of the human brain.

They are widely used for image recognition and patient diagnosis and comprise many layers that
accept data (input layer), compute predictions (hidden layer), and provide output (output layer)
in the form of a single prediction.
 Text Analytics

Text Analytics is used when a company wants to anticipate a numerical number. It is built on
approaches from statistics, machine learning, and linguistics. It assists in predicting the themes of
a document and analyzes words used in the supplied form.

 Regression Model

A regression method is crucial for the organization when it comes to estimating a numerical
number, such as how long it will take a target audience to return to an airline reservation before
purchasing, or how much money someone would spend on vehicle payments over a specific
length of time.

Want to Get Paid The Big

Logic-Driven Models
Logic driven models are created on the basis of inferences and postulations which the
sample space and existing conditions provide. Creating logical models require solid
understanding of business functional areas, logical skills to evaluate the propositions
better and knowledge of business practices and research.

To understand better, let us take an example of a customer who visits a restaurant around
six times in a year and spends around ₹5000 per visit. The restaurant gets around 40%
margin on per visit billing amount. The annual gross profit on that customer turns out to
be 5000 × 6 × 0.40 = ₹12000. 30% of the customers do not return each year, while 70%
do return to provide more business to the restaurant.

Assuming the average lifetime of a customer (time for which a consumer remains a
customer) W 1/.3 = 3.33 years. So, the average gross profit for a typical customer turns
out to be 12000 × 3.33 = ₹39,960.

Armed with all the above details, we can logically arrive at a conclusion and can derive
the following model for the above problem statement:

Economic Value of each Customer (V) = (R × F × M)/D

Where,

R = Revenue generated per customer

F = Frequency of visits per year

 M = Profit margin

D = Defection rate (Non-returning customers each year)

Data-Driven Models
The main aim of data-driven model concept is to find links between the state system
variables (input and output) without clear knowledge of the physical attributes and
behaviour of the system. The data driven predictive modelling derives the modelling
method based on the set of existing data and entails a predictive methodology to forecast
the future outcomes.

It is data-driven only when there is no clear knowledge of the relationships among

variables/system, though there is lot of data. Here, you are simply predicting the
outcomes based on the data. The model is not based on hand-picked variables, but may
contain unobserved, hidden combination of variables.

Step by Step Predictive Analysis – Machine Learning

 Read

 Discuss

 Courses

 Video





Predictive analytics involves certain manipulations on data from existing data

sets with the goal of identifying some new trends and patterns. These trends
and patterns are then used to predict future outcomes and trends. By
performing predictive analysis, we can predict future trends and performance. It
is also defined as the prognostic analysis, the word prognostic means
prediction. Predictive analytics uses the data, statistical algorithms and machine
learning techniques to identify the probability of future outcomes based on
historical data.
Why is predictive analysis important?
In predictive analysis, we use historical data to predict future outcomes. Thus
predictive analysis plays a vital role in various fields. It improves decision
making and helps to increase the profit rates of business and reduces risk by
identifying them at the early stage.
Predictive analysis is used in various fields like:
 Online Retail
 Healthcare
 Education
 Reduces Risks
 Fraud Detection
 Improvised market campaigning
 weather forecasting
 Social Media Analysis
 cyber security
 Recommendation and search engines
 Government Sector etc.
Steps To Perform Predictive Analysis:
Some basic steps should be performed in order to perform predictive analysis.
1. Define Problem Statement:
Define the project outcomes, the scope of the effort, objectives, identify the
data sets that are going to be used.
2. Data Collection:
Data collection involves gathering the necessary details required for the
analysis. It involves the historical or past data from an authorized source
over which predictive analysis is to be performed.
3. Data Cleaning:
Data Cleaning is the process in which we refine our data sets. In the process
of data cleaning, we remove un-necessary and erroneous data. It involves
removing the redundant data and duplicate data from our data sets.
4. Data Analysis:
It involves the exploration of data. We explore the data and analyze it
thoroughly in order to identify some patterns or new outcomes from the data
set. In this stage, we discover useful information and conclude by identifying
some patterns or trends.
5. Build Predictive Model:
In this stage of predictive analysis, we use various algorithms to build
predictive models based on the patterns observed. It requires knowledge of
 python, R, Statistics and MATLAB and so on. We also test our hypothesis
using standard statistic models.
6. Validation:
It is a very important step in predictive analysis. In this step, we check the
efficiency of our model by performing various tests. Here we provide sample
input sets to check the validity of our model. The model needs to be
evaluated for its accuracy in this stage.
7. Deployment:
In deployment we make our model work in a real environment and it helps in
everyday discussion making and make it available to use.
8. Model Monitoring:
Regularly monitor your models to check performance and ensure that we
have proper results. It is seeing how model predictions are performing
against actual data sets.