Concept of External Environment Audit and Forecast

Home Articles Concept of External Environment Audit and Forecast

Every organization operating in the market has to face an external environment to grab the opportunities and face the threats. The external environment of the business world is very dynamic and uncontrollable in nature. Management of the business organization has to plan and operate its functions in such a way that it can get the benefit of existence and face the external environment efficiently. It is necessary to adapt to the changes in the external environment which are possible if the company has prepared itself well before. For timely preparations, a company has to forecast the changes in the external environment of the business organization.

The forecast depends upon the past performance and trend of the market and it is done to predict the future and plan all the operations and activities of the business effectively. Better planning ensures better performance and reduces the dependability of success of the business on chance. There are two approaches to forecasting, which are as follows:
Top-down Approach requires the analysis of the business environment from the overall economy to industry level and the company or unit level will be analyzed. Whereas,
Bottom-Up Approach requires analysis of unit or company first and then analyze the factors of industry and the overall economy.

External Auditor forecasting requires analysis of different factors which have a great impact on the functioning of the business organization and provide a basis for planning and development. There are mainly four types of external forecasting which are as follows:

Economic Forecasting: The economic analysis provides the knowledge of economic conditions or business cycle which constitutes of Boom, Recession, Depression, and Recovery. With the changing level of business level, the profits generated, sales or revenue generated will get changed. As, the needs and demands of customer vary in different phases, so the timely forecasting will protect the company form over-investment in the market and production if the business cycle is going to be a depression period. On the other hand, with the knowledge of the upcoming Boom period a company can prepare or produce the product accordingly. The techniques for economic forecasting are as follows:
• Extrapolation
• Leads and Lags
• Econometrics

Technology Forecasting provides information about changes or launch of technology in the market and its impact on the performance and working of an organization. it provides information about the rate of change of technology in the market and the impact of new technology on the existing machines and plant setup of an organization. An organization has to take the following decisions out of technological forecasting:
• Should a firm continue the usage of existing technology or machines or replace it
• If the replacement is necessary,
• How a company should acquire new technology or equipment's, should buy it or take on the lease.

The technological forecasting can be done in two ways, which are
• Exploratory forecasting
• Normative Forecasting

Forecasts regarding Government Policies: The political environment of an economy plays a significant role in the performance of an organization. As it creates rules and policies related to the business world. Every political party has its own leading style and agenda's, which is shown in the formulated policies, the changes in the government policies boost the economy and provide financial incentives to improve the technology and assist business organizations to acquire such technology. The incentives are provided to regulate and develop the economy and prevent monopoly by updated organizations and promote healthy competition in the market.

Sales Forecasting: The timely forecasting of sales in the market will provide the information of a number of units to be manufactured and an organization can acquire the resources and plan their production process accordingly. Which will help the firm to retain the customer and increase the market share by providing quality goods and services?