Question

What are some tools and methods used to forecast earnings? Chose one and assess its strengths and weaknesses. How reliable are earnings forecasts, and how are they used to make decisions?

Answer 1

Forecasting is a technique or tool used to take decision for future.It is a very important part of the organization,where the managers analyse the past data to take the decision for the future growth of the business.This process is called forecasting method.

There are generally four tools and method used to forecast earning:

1) Qualitative method - Qualitative is successful and mostly used for the short term goals.where no hard data is available  and the scope of forecast is limited.Qualitative method can be used for the short term prediction for the startup like companies.Qualitative method includes

• Market research - where no hard data is already available and polling the huge numbers of people to collect the data for a specified product.
• Delphi method - Asking the expert or the experienced person for general experience and then compiling in the forecasting.

2) Quantitative method - Quantitative method used to forecast the future by analysing the past data.Quantitative method generally used the numbers and data's to analyse the forecast for future.It can be used for both the short term goal and long term goals and planning.

3) Casual method - Casual method is used in the forecasting to predict the relationship between things.Understanding the relationship between the data set will help the organization to make the better plan for the future growth.

Some of the other forecasting methods are:

• Naive forecasting method
• Judgmental forecasting method
• Time series forecasting methods

I have choose Qualitative method.Some of the strength of qualitative forecasting method

1. Subject material can be evaluated with the greater details.
2. It is totally based on the human experience and observation.
3. Gathered data have predictive quality to it.
4. It is a open ended process.
5. It is used to save the cost of the organization.
6. It is helping in decision making for future benefits.

Some of the weakness are:

1. Some times if the data is inaccurate or the prediction is wrong.this forecasting method will fail.
2. Mismatch between the other forecasting method.prediction is always not the same by using the different methods.
3. Data rigidity is more difficult to demonstrate and assess.
4. Data created through the Qualitative method are not always accepted.
5. Researcher influence can effect the method or data.
6. It is not statically represented.

In the earning forecast we predict some future earning by analysing the data is called the earning forecast.Generally earning forecasting is totally depend on the Prediction, data ,source and decision making.If organization source and primary and secondary data is correct.you may be earn some money by predicting and analysing the data.Mostly of the organization used the Earning forecast to predict there earnings in future.We can't say that earning forecasting is totally reliable.when the source data and your decision making is not good.You may face the lose in the market.

Earning forecasting help the organization to take decision by:

• earning forecast will help to take the financial decision for future.
• It provide the basic and necessary information about the financial condition of the organization in future by analysing the past,present data.
• It help the managers to take the decision by providing the necessary information.
• It provides the information for expansion plans of business and future growth needs of the organization.