Business managers have to make plans for future levels of production. It is required to make necessary arrangements for the purchase of raw materials, recruiting and training the required skilled labor and for arranging the required funds for production etc. forecasting demand means estimation of future demand. Good forecast of future demand is a necessary pre-condition for proper planning of future level of production. The need for demand forecasting is briefly explained below.
It is on the basis of production plans firms make necessary arrangements for the purchase of raw materials, recruiting and training the required skilled labor and for arranging the required funds for production etc. production planning without demand forecasting leads to the problem of over production or under production. Demand forecasting is also important for taking decisions regarding the capital investment. They are taken by comparing the expected rate of return on investment with the present rate of interest. If the expected rate of return on investment is more than the present rate of interest the investment is profitable and it may be accepted. The expected rate of return is calculated on the basis of the anticipated demand for the product over a number of years in future.
Forecasting also helps to take decisions regarding advertisement and sales promotion. If the demand forecast reveals that the demand for its product is not sufficient, it can think of increasing expenditure on advertisement and sales promotions to increase the demand for its product. Management of inventory is the next feature of demand forecasting. Inventories like raw materials, work in progress, finished goods etc. can be easily managed. Demand forecasting at the national level helps the central bank and government to implement appropriate monetary and fiscal policies. The government can think of lowering tax in order to stimulate consumption and increasing the demand.