The economic analysis and the forecast are two powerful tools that businesspeople use to assess the current health and future direction of a company, organization or government. Historical data, mixed with knowledge about current market conditions and available resources are factors that affect the choices that businesspeople make. One analysis examines the strengths and weaknesses of an economy, while the other focuses on an organization's role in it.
Economic Analysis
An economic analysis begins when a business needs to make a decision about where and use limited resources to achieve a specific goal. Usually, the analysis compares two or more methods of achieving the goal; each alternative is measured in dollars for both opportunity costs and benefits to an economy. The analyses will also take into account specific assumptions and constraints; budgetary and legal issues are common assumptions and constraints with economic analysis.
Importance
Measuring the costs and benefits of potential outcomes of a decision is an essential task for the businessperson who wishes to make a reasoned and defendable choice. Weighing the effects of each analyses helps eliminate waste, whether dollar or human capital. It also helps the organization operate more efficiently if the first choice becomes unworkable; if that occurs, then the organization may have a tailor-made solution in the second choice ready to implement. The first choice may become unworkable if a key assumption or constraint is added or changed -- economic analysis assumes that all things remain constant -- which, in the business world, rarely happens.
Forecasting
The forecast is an analysis that predicts a business' results over a period of time. It uses actual or historical data as a guide, and adds information about current market conditions and anticipated future activity. The results of an economic analysis may force a new forecast if the organization decides to implement a decision based on the economic analysis. For example, if an economic analysis indicates that there is a net benefit from adding hamburgers to a restaurant menu, then a forecast would predict the added revenue and expense of adding hamburgers.
Importance
An accurate forecast helps the business plan for future use of its resources. Businesses like certainty. Forecasts that differ wildly from what actually occurs is harmful -- even if the results are better than anticipated. A business that had a bad forecast probably wasn't able to plan its use of resources efficiently; it may have even missed an important expansion or market opportunity. Businesses that don't grow or thrive may fail; as a result, understanding the market through economic analysis and using its information to make accurate predictions through forecasting is important.
