So many people forget about the key fundamentals of forecasting - have you?

1. HAVE YOU
FORGOTTEN:
The Fundamentals of Forecasting?
“I think there is a Forecasting Fundamentals
world market for 1. Your forecast will always
be wrong
about five computers.”
Sometimes we forget this
– Thomas Watson, Chairman
obvious truth. A forecast is
of IBM, 1958
just that, an estimate, a
predicted future result. The
question you should be asking,
Sometimes forecasting the of course, is “how wrong is
future is fraught with our forecast?”
difficulties. Even those
2. Simple forecast
entrepreneurs whom we place
methodologies often
JEFF ROBSON on a pedestal don’t always trump complex ones
CEO have the business foresight we
Access Analytic assign to them. What can There is danger in complexity.
jrobson@accessanalytic.com.au seem certain can turn out to Forecasts that rely on
be false. What can seem complicated methods often
highly unlikely can become
"There is no reason everyday.
hide key assumptions built
into the model. When key
anyone would want a assumptions are obscured it
Rather than go into a deep
computer in their discussion about forecasting
can lead to unexpected and
hard to trace failures. On the
home." and modelling techniques, we other hand, simple forecast
wanted to remind you about methods are easy to
– Ken Olson, president, some core principles. Lessons understand, to analyse and to
chairman and founder of that at times can easily be work out why it went wrong.
Digital Equipment Corp., 1977 forgotten, to the detriment of
the quality and accuracy of
your financial models.
“640KB ought to be
enough for anyone”
– Bill Gates, 1981
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2. Forecasting is Hard! determine the component
You’re usually better off using parts, than to forecast the
3. A correct forecast (or at solid data and adding further component parts and then
least a highly accurate one) assumptions than to work add them up to determine the
does not prove your with rarely used data. bigger number.
forecast method is correct
5. All trends will eventually 8. Technology is not the
It could have been chance. end (that’s why they’re solution to better
When you accurately project called trends) forecasting
financial and other key
performance indicators, it’s Many factors will affect the Robust forecasting comes
still important to check your pattern you’re trying to from sound logic in your
methods. If you only question forecast. It doesn’t matter methodology. First, create an
your methods when there is a how accurately you predict appropriate strategy and then
large variance in the data, the trend, in the future the use technology to make it
you’ll miss all those times your variables will change and the more successful and efficient.
forecast was just lucky – forecast will be wrong. Technology is not the answer
potentially hiding a multitude … it’s the tool to make it
6. It’s hard to eliminate
of sins. better.
bias, so most forecasts are
4. If you don’t use the data biased So remember these core
regularly, trust it less principles and you’ll be
when forecasting Let’s not forget we’re talking
about predictions here. When building your forecasts on
you have to make a range of solid foundations.
The quality of your data is
proportional to the amount assumptions (which factors to
And try not to make the same
you use it. include, how strongly to
mistake as Ken Olson, Bill
weight them etc.), it’s likely
Gates or Thomas Watson –
When information is not that you will be adding some
being that wrong never makes
regularly used errors often bias to the forecast.
you look good!
remain undetected (and errors
are common in financial 7. Large numbers are easy
models). Regular use of data to forecast than small ones
helps identify mistakes and
It’s usually better to forecast
smooths out inconsistencies
the bigger number and work
over time.
back the calculation to
© ACCESS ANALYTIC SOLUTIONS PTY LTD
SUITE 143, LEVEL 1, 580 HAY ST, PERTH, WESTERN AUSTRALIA 6000
www.accessanalytic.com.au

3. Help!
At Access Analytic, we help
clients develop robust forecast
models every day.
We are experts in financial
modelling, budgeting and
forecasting and count some of
Australia’s largest companies
amongst our clients.
If you’d like to chat about your
forecast models and how you
can make your decisions with
confidence, call us on +61 8
6210 8500, or email us at
info@accessanalytic.com.au
today!
© ACCESS ANALYTIC SOLUTIONS PTY LTD
SUITE 143, LEVEL 1, 580 HAY ST, PERTH, WESTERN AUSTRALIA 6000
www.accessanalytic.com.au