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Types of Forecasting Methods

By: Billie Nordmeyer MBA, MA

Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
Updated October 25, 2018
MCCAIG/E+/GettyImages

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Forecasts serve as decision support tools that allow leaders to plan for the future by performing
“what-if” analyses to determine how changes in inputs affects outcomes. For example,
forecasts help a business identify appropriate responses to changes in demand levels, price-
cutting by the competition, economic ups and downs and more. To receive the greatest benefit
from forecasts, leaders must understand the finer details of the different types of forecasting
methods, recognize what a particular forecasting method type can and cannot do, and know
what forecast type is best suited to a particular need.

Naive Forecasting Methods

The naïve forecasting methods base a projection for a future period on data recorded for a past
period. For example, a naïve forecast might be equal to a prior period’s actuals, or the average
of the actuals for certain prior periods. Naïve forecasting makes no adjustments to past periods
for seasonal variations or cyclical trends to best estimate a future period’s forecast. The user of
any naïve forecasting method is not concerned with causal factors, those factors that result in a
change in actuals. For this reason, the naive forecasting method is typically used to create a
forecast to check the results of more sophisticated forecasting methods.

Qualitative and Quantitative Forecasting Methods

Whereas personal opinions are the basis of qualitative forecasting methods, quantitative
methods rely on past numerical data to predict the future. The Delphi method, informed
opinions and the historical life-cycle analogy are qualitative forecasting methods. In turn, the
simple exponential smoothing, multiplicative seasonal indexes, simple and weighted moving
averages are quantitative forecasting methods.

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Casual Forecasting Methods

Regression analysis and autoregressive moving average with exogenous inputs are causal
forecasting methods that predict a variable using underlying factors. These methods assume
that a mathematical function using known current variables can be used to forecast the future
value of a variable. For example, using the factor of ticket sales, you might predict the variable
sale of movie-related action figures, or you might use the factor number of football games won
by a university team to predict the variable sale of team-related merchandise.
 Judgmental Forecasting Methods
The Delphi method, scenario building, statistical surveys and composite forecasts each are
judgmental forecasting methods based on intuition and subjective estimates. The methods
produce a prediction based on a collection of opinions made by managers and panels of experts
or represented in a survey.

Time Series Forecasting Methods

The time series type of forecasting methods, such as exponential smoothing, moving average
and trend analysis, employ historical data to estimate future outcomes. A time series is a group
of data that’s recorded over a specified period, such as a company’s sales by quarter since the
year 2000 or the annual production of Coca Cola since 1975. Because past patterns often repeat
in the future, you can use a time series to make a long-term forecast for 5, 10 or 20 years. Long
term projections are used for a number of purposes, such as allowing a company’s purchasing,
manufacturing, sales and finance departments to plan for new plants, new products or new
production lines.

References

About the Author

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ACCOUNTING

How do I Calculate Seasonality?

By: Andrea Stein

Updated September 26, 2017
business line graph image by Nicemonkey from Fotolia.com

RELATED

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Seasonality refers to periodic fluctuations exhibited by time series, or a statistical sequence of

data points measured at uniform time intervals. Seasonality can be calculated via a run
sequence plot.

Run Sequence Plot

 A run sequence plot refers to a graph used to display observed data in a time series, and it
typically represents an aspect of the performance or output of a business-related process. The
run sequence plot displays data samples taken over a specific period of time. An example of
run sequence plot data would be the temperature of a dish washing machine each time it is run,
where time would be represented by the (Y) vertical axis, and the amount of water used to run
the machine during a cycle represented by the horizontal (X) axis.

Anomalies
Run sequence plot charts are analyzed to detect anomalies, or unusual measurements, that
occur during a time series. Factors involved in analyzing anomalies include abnormally long
series of consecutive decreases or increases in data, and the total amount of such series in a
data set.

Seasonal Subseries Plot

The seasonal subseries plot may be used after a run sequence plot is constructed to detect
seasonal differences between group patterns and within group patterns. Season subseries plots
use a horizontal axis to display time ordered by month. The vertical axis represents a time
variable, or values directly dependent on time.

References

Photo Credits

Related Articles

 How do I Calculate Seasonality?

 The Advantages of the Time Series Method of Forecasting
 The Disadvantages of Long-Term Cash Flow Forecasting
 Qualitative Judgment Method
 What Is a Qualitative Forecasting Model?
 How to Perform Factor Analysis
 Six Types of Qualitative Research
 Consumer Perception & Attitudes: Research Methods
 Importance of Statistics to Industry & Business
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SALES

The Advantages of the Time Series Method

of Forecasting

By: Vanessa Cross

Updated September 26, 2017

RELATED

HOW DO I CALCULATE SEASONALITY?

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Quantitative and qualitative methodologies for forecasting help managers to develop business
goals and objectives. Business forecasts can be based on historical data patterns that are used
to predict future market behavior. The time series method of forecasting is one data analysis
tool that measures historical data points -- for instance, using line charts -- to forecast future
conditions and events. The goal of the time series method is to identify meaningful
characteristics in the data that can be used in making statements about future outcomes.

Reliability
 Historical data used in time series tests represent conditions reporting along a progressive,
linear chart. The time series method of forecasting is the most reliable when the data represents
a broad time period. Information about conditions can be extracted by measuring data at
various time intervals -- e.g., hourly, daily, monthly, quarterly, annually or at any other time
interval. Forecasts are the soundest when based on large numbers of observations for longer
time periods to measure patterns in conditions.

Seasonal Patterns
Data points variances measured and compared from year to year can reveal seasonal
fluctuation patterns that can serve as the basis for future forecasts. This type of information is
of particular importance to markets whose products fluctuate seasonally, such as commodities
and clothing retail businesses. For retailers, for instance, time series data may reveal that
consumer demand for winter clothes spikes at a distinct time period each year, information that
would be important in forecasting production and delivery requirements.

Trend Estimations
As a linear model of analysis, the time series method can also be used to identify trends. Data
tendencies reporting from time series charts can be useful to managers when measurements
show an increase or decrease in sales for a particular product or good. For example, an upward
trend in the daily sales for widget X at a particular franchise store may serve the basis for trend
estimation at similarly situated franchise stores.

Growth
The time series method is a useful tool to measure both financial and endogenous growth,
according to Professor Hossein Arsham of the University of Baltimore. In contrast with
financial growth, endogenous growth is the development that occurs from within from an
organization's internal human capital that can lead to economic growth. The impact of policy
variables, for instance, can be evidenced through time series tests.

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