Extrapolation

• Extrapolation involves the use of trends established by historical data to make predictions about future values
• The basic assumption of extrapolation is that the pattern will continue unless evidence suggests otherwise
• A moving average takes a data series and 'smoothes' the fluctuations in data to show an average
• The aim is to take out the extremes of data from period to period
• Moving averages are often calculated on a quarterly or weekly basis
• The moving average helps point out the growth trend, and it is this which extrapolation would use first to predict the path of future sales
• This could be done mathematically using a spreadsheet
• Alternatively, an extrapolated trend can simply be drawn on the chart as a rough estimate
• Advantages of extrapolation

  • simple method of forecasting
  • not much data required
  • quick and cheap
• Disadvantages of extrapolation

  • unreliable if there are significant fluctuations in historical data
  • assumes past trends will continue into the future - unlikely in many competitive business environments
  • ignores qualitative factors