There are very few analysts who truly enjoy forecasting or working with forecasting analytics. This is because over the years, there has been over optimism in doing forecasts and the problem with over optimism in forecasting is that it results to inaccuracy.
Now anyone working in the finance department or sales department knows that forecasts are only useful when they are fairly accurate otherwise, they are just a complete waste of time.
However, it cannot be denied that if an organization is determined to succeed, forecasting is a necessary evil. It must always be part of an effective management strategy. Inaccurate forecasts may lead to loss of investor confidence or poorly managed cash flow among others.
There is no right or wrong forecasting technique because businesses vary in complexity and what works for one company might not necessarily work for the other. That being said, over the years that we have been working with several companies as external advisors on how to improve the way they budget and forecast, we learned that there are universal ways on how to improve forecasting accuracy.
Below are some of the tips that we can share with analysts in order to increase their efficiency and increase their forecasting accuracy.
- Use multiple scenarios/ forecast
One key learning that many of our consultants learned through years of consulting experience is that it is not smart to just operate on a single scenario. As mentioned earlier, some people tend to be very optimistic when forecasting so in order to try and counter the dangers of over optimism, using multiple scenarios is beneficial.
With multiple scenarios, an analyst can have a scenario where he or she can be optimistic and the other one is a scenario where he or she is rather conservative or cautious in his or her forecasting. Operating on multiple scenarios is very valuable especially in times like today when there are many uncertainties affecting businesses.
We are, of course, aware that doing multiple scenarios or forecasts can be very tedious for some and it is against observed corporate practices of some companies but what we can guarantee is that using multiple scenarios and forecasts gives your company flexibility in its long term planning and in setting realistic expectations to your stakeholders.
- Make sure sales forecasts are updated regularly
Another tip on how to increase forecasting accuracy is by making sure that sales forecasts are updated regularly.
The truth of the matter is that it is not possible to have just one test that can accurately track conditions, timing, and premise of every sale. This is why having a good forecasting technique is to have a process that is very easy to manage, assess, and change or update as the need arises.
Now to be able to do that it means that data must be updated regularly and religiously. Frontline managers must have a thorough understanding of the sales system, customer details and history, sales context, and even the history of his or her sales agents. It is not enough that one forecasts based on historical data. Other factors must also be considered in order to be able to predict with a higher degree of certainty.
- Identify assumptions and risks
When doing forecasting, an analyst is expected to make assumptions about factors that are not within the company´s control. Therefore, identifying multiple forecasting assumptions and risks is a good practice.
By looking at multiple assumptions and risks, an analyst can have a deeper assessment of market conditions, level of certainty, financial materiality, and the financial effects of these uncertainties. All these are good information to have as they will have significant effects on the business.
- Make historical Comparisons
In order to assess the probabilities of your forecasts, it is important to use historical data for comparison purposes. An analyst should always compare their forecasts to actual results and results of comparable companies.
Understandably so, it is not always very easy to find data from comparable businesses but having the ability to compare your projections to the company´s historical performance is a good start.
Now not all companies have historical data handy or for some who operate in spreadsheets, comparing is not always very easy. This is why it is a smart idea to invest in a solution such as Performance Canvas Financials that can store historical data, audit trails or cause of change as well as have year on year comparisons because all these can be very valuable in increasing forecasting accuracy.
- Understand the effect of certain Exceptions
A good forecasting process has to have an ability to highlight circumstances that constitute as exceptions because it is important to be able to filter or comb through historical data.
An analyst must be able to remove one-time variables that can drastically impact the forecast. These may include promotions that are run during specific periods or quarters, select competitor activities, new competitors undercutting prices, sales to move inventory etc.
- Make forecasting collaborative and Inject accountability in the forecasting process
In order for forecasting to be useful, it has to involve different sets of people from various units especially those whose performance are measured against it or those that are severely affected by it.
Forecasting not only requires constant updating from several stakeholders, it also requires acceptance and faith in the forecasts for it to be used as part of an overall strategy. Therefore, it must always be collaborative. Whimsical forecasts are just totally ignored by those who do not buy into the projections.
More than that, forecasting must be seen as a key value-added business process that will help attain the desired business control within sales and operations.
Effective forecasting demands clarity on who is responsible and accountable for these projections. More often than not, this accountability is with the sales and marketing team which is why it is important that they are involved in every step of the way.
- Do not overcomplicate the process
Contrary to popular belief, increasing forecasting accuracy does not mean utilizing high level mathematics or statistics.
In fact, what we have observed is that many businesses operate on very simplistic, archaic, and unsophisticated models so there really is no need to overcomplicate the entire forecasting process. The process must be managed not by a mathematical or statistical genius but by a finance person who has particular interest and eye for forecasting.
In addition, by investing in a budgeting and forecasting software, you can even further simplify the entire process through streamlining via setting up of business rules and through intelligent automation.
- Assess, reassess, publish, and improve
A forecast that is done at the beginning of the fiscal year that is to be set in stone and ignored for the rest of the year is totally useless. There must always be regular checks and assessments in order to see how far or close your projections are from the actual results.
By ensuring you have the most recent and relevant information, the company is better equipped to answer questions that are necessary for strategic decision making. Further, not only do you increase your forecasting accuracy, you also constantly improve your forecasting technique because you will keep learning every step of the way.
By publishing and sharing this information as well, front liners will be more engaged, aware, and motivated to hit their targets.
If you want to know more about how to increase your company´s forecasting accuracy with the aid of a modern budgeting and forecasting software, visit www.performancecanvas.com or email firstname.lastname@example.org to talk to one of our consultants today.
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