Every business firm aims at profit maximization. It should carefully observe the demand conditions for its product. It should also predict or estimate the changes in demand in future. A prediction or estimation of future demand for the product is known as demand forecasting. Generally every business firm predicts a number of related forecasts. Since the future is uncertain, these forecasts may not be hundred percent correct. But every firm tries to obtain the forecasts as precisely as possible.
Demand forecasting has a great importance in business planning. An accurate demand forecasting helps the firm in several ways. It enables the firm to produce the required quantities at the right time. It helps to arrange the various factors of production well in advance. It helps a firm to estimate the future demand for its products and plan its production. Sales forecast is the foundation for planning. All phases of the firm’s operations depend on sales. For example, purchasing commitments, cash budgets, inventory plans, production plan, etc. will be formulated basing on sales forecasts. Demand forecast has a wide popularity in industrially developed nation. The demand conditions are always uncertain than the supply conditions in developed countries. It’s getting importance in developing countries also. Supply is the limiting factor in developing countries.
For an example, derived demand for iron and steel in future depends upon the supply of and demand for iron and steel. The production of iron and steel can be increased in future if its present demand is more. But the production of iron and steel can be increased by employing more laborers and machinery. As a result balance between demand and supply can be achieved. Derived demand is indeterminate. But autonomous demand is determinate. Especially in the case of those goods having alternative uses, determination of derived demand becomes a problem.