On LinkedIN, we discuss the benefits of incorporating predictive analytics in your product management dashboard.
From the gut instinct of a small entrepreneur to the complex models of a large multi-national, every business has an estimate of how much they will sell and how much it will cost. Forecasting is an essential function of a business. Yet, there are wide-ranging methods and advice on how to create your forecast.
Successful teams view forecasting as a continually improving process. They realize the importance of forecasting as not only a financial process, but an exercise in which strategic thinking is spread throughout the organization.
Although there is no one-size-fits-all approach to forecasting, the following practices should be in every team’s process.
Incorporate More Than One Prediction
There are many ways to forecast. Approaches include run-rate, qualitative, statistical, crowd-sourced, and zero-based to name a few. Using just one other technique can extend the relevance of your forecast. As in weather forecasting, meteorologists don't rely on a single storm track. Given the many moving parts in a business and the markets it faces, businesses should plan for a range of outcomes.
Different methodologies have different costs and time requirements. Increasingly, data science is playing a role in building and maintaining prediction tools to help reduce the time required to look through scenarios.
Use an Approach Which Can Strip Away Bias
Incorporating a quantitative method, such as trend or econometric analyses, is one way to strip bias from projections. These methods can identify what is speculative in a forecast and provide scenarios outside of group-think ranges. They can offer a guideline and help start a discussion of what must change to reach the forecast target. Statistical methods rely on the quality of the underlying data and can be augmented by solid objective thinking.
Budgets can be prayers, boxed in conflicted motivations, wrapped in a ribbon of hope.
Collaborate Early and Often
Establishing a process of collaboration, where the team can ask questions, track answers and lend comments, can save enormous amounts of meeting time. The collaboration can be as simple as allowing stakeholders to look in on budget assumptions at certain stages. Open budget collaboration is a process which needs to have clear procedures and works best in a team environment.
Track How Well the Forecast Fared
Is the budget out of date in three months? Did the forecast materially describe the performance of the business or department? If not, a process review is a healthy step to test the current forecasting methods. Often a review of how other methods would have fared can reveal whether it was simply the changing nature of business or an imperfection in the forecasting process. This can establish the basis for a rolling forecast.
Periodically evaluating your forecast processes, just as a business seeks to improve its sales or production processes, can yield benefits. Benefits such as capital deployment return, human resource effectiveness and business development efficiency.