Budgeting Basics and Beyond

14.3. Selection of Forecasting Method

The choice of a forecasting technique is influenced significantly by the stage of the product life cycle and sometimes by the firm or industry for which a decision is being made.

In the beginning of the product life cycle, relatively small expenditures are made for research and market investigation. During the first phase of product introduction, these expenditures start to increase. In the rapid growth stage, considerable amounts of money are involved in the decisions, so a high level of accuracy is desirable. After the product has entered the maturity stage, the decisions are more routine, involving marketing and manufacturing. These are important considerations when determining the appropriate sales forecast technique.

After evaluating the particular stages of the product and firm and industry life cycles, a further probe is necessary. Instead of selecting a forecasting technique by using whatever seems applicable, decision makers should determine what is appropriate. Some of the techniques are quite simple and rather inexpensive to develop and use. Others are extremely complex, require significant amounts of time to develop, and may be quite expensive. Some are best suited for short-term projections, others for intermediate- or long-term forecasts.

What technique or techniques to select depends on six criteria:

1. What is the cost associated with developing the forecasting model, compared with potential gains resulting from its use? The choice ...