HAVE YOUFORGOTTEN:The Fundamentals of Forecasting?                                                   “I think there is a  ...
Forecasting is Hard!                                                                 determine the component              ...
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Article: Forecasting Fundamentals

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

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Article: Forecasting Fundamentals

  1. 1. HAVE YOUFORGOTTEN: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 oftenJEFF ROBSON on a pedestal don’t always trump complex onesCEO have the business foresight weAccess 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 keyanyone would want a assumptions are obscured it Rather than go into a deepcomputer in their discussion about forecasting can lead to unexpected and hard to trace failures. On thehome." 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 tochairman 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 beenough for anyone”– Bill Gates, 1981© ACCESS ANALYTIC SOLUTIONS PTY LTDSUITE 143, LEVEL 1, 580 HAY ST, PERTH, WESTERN AUSTRALIA 6000www.accessanalytic.com.au
  2. 2. Forecasting is Hard! determine the component You’re usually better off using parts, than to forecast the3. A correct forecast (or at solid data and adding further component parts and thenleast a highly accurate one) assumptions than to work add them up to determine thedoes not prove your with rarely used data. bigger number.forecast method is correct 5. All trends will eventually 8. Technology is not theIt could have been chance. end (that’s why they’re solution to betterWhen you accurately project called trends) forecastingfinancial and other keyperformance indicators, it’s Many factors will affect the Robust forecasting comesstill important to check your pattern you’re trying to from sound logic in yourmethods. If you only question forecast. It doesn’t matter methodology. First, create anyour methods when there is a how accurately you predict appropriate strategy and thenlarge variance in the data, the trend, in the future the use technology to make ityou’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 answerpotentially hiding a multitude … it’s the tool to make it 6. It’s hard to eliminateof sins. better. bias, so most forecasts are4. If you don’t use the data biased So remember these coreregularly, trust it less principles and you’ll bewhen 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 isproportional to the amount assumptions (which factors to And try not to make the sameyou 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 makesregularly used errors often bias to the forecast. you look good!remain undetected (and errorsare common in financial 7. Large numbers are easymodels). Regular use of data to forecast than small oneshelps identify mistakes and It’s usually better to forecastsmooths out inconsistencies the bigger number and workover time. back the calculation to© ACCESS ANALYTIC SOLUTIONS PTY LTDSUITE 143, LEVEL 1, 580 HAY ST, PERTH, WESTERN AUSTRALIA 6000www.accessanalytic.com.au
  3. 3. Help!At Access Analytic, we helpclients develop robust forecastmodels every day.We are experts in financialmodelling, budgeting andforecasting and count some ofAustralia’s largest companiesamongst our clients.If you’d like to chat about yourforecast models and how youcan make your decisions withconfidence, call us on +61 86210 8500, or email us atinfo@accessanalytic.com.autoday!© ACCESS ANALYTIC SOLUTIONS PTY LTDSUITE 143, LEVEL 1, 580 HAY ST, PERTH, WESTERN AUSTRALIA 6000www.accessanalytic.com.au

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