Forecasting is in general defined as a prediction of future events, based on historical data, opinions, trends, events or known future variables. The purpose being:

• To prepare Sales and other budgets
• To determine resource requirements
• To provide a basis for business planning
• To establish targets and plan investments
• To forecast cash flow and profits

And thus, forecasting becomes the corner stone for decision making.

Some common pitfalls in forecasting
The process of  forecasting is often based on trends. And typically, this is the most recent trend experienced. Forecasting is a very cumbersome process and above all: a number of events tend to make the results obsolete even before the process is fully accomplished. This becomes a big challenge in a highly dynamic future environment. It becomes even more problematic when, as in many cases, we build backwards to a plan that justifies a predefined outcome.

Some companies have been combining this scenario with a bottom up approach by Sales, in order to define individual targets as well as a final budget. Yet, Sales is mostly starting off from historic numbers. Or worse: include their bonus and management expectations in their considerations.

Forecasting as a backbone in dynamic market conditions
How can we now improve our visibility? And even more important: can we use forecasting as a backbone to become more agile to the ever increasing dynamic market conditions?

The answer is scenario-based forecasting. This has recently been acknowledged by the Vlerick Leuven Gent management school in their study “Strategy execution in the aftermath of the financial crisis”. This bottom up approach is of course using all knowledge and experience as mentioned above. But it results in 3 different scenario’s: worst case, most realistic and best case scenario. Companies using scenario-based forecasting and planning can easily test their operational plan on an ongoing basis, instead of once or twice a year. A sensitivity analysis of the business can be stated in terms such as “what is the impact of …”

5 must-do’s in forecasting

• Use a rolling forecast instead of a yearly process
  Divide your forecast in periods which take the typical buying cycle length into account.
  You can use quarters but it may be appropriate to use 4 or 6 week cycles for more transactional business
• Test and compare with your ongoing operational results and upgrade/ add periods to your scenario’s
• Work on a fully transparent basis with Sales
• Make sure remuneration and bonuses are in line with operational expectations
  Use a motivating and uncapped bonus system by e.g. using an accelerator for over-achievement.
  You will thus avoid sandbagging and Sales undermining your visibility covering their own interests
• Make sure your pipeline is used on a daily basis for (self)-coaching purposes
  Read my blog: How to improve your forecast accuracy for more details on this topic

The next time you work on a forecast, remember to ask yourself : “How can I use forecasting as an ongoing process that will allow me to manage pro-actively”.