Accuracy comes from eliminating bias. To get there, prepare both a top-down and a bottom-up forecast.
If Finance runs the forecast independently, without business leaders feeling accountable for delivering it, it doesn’t add much value. And most likely, accuracy suffers as a result.The best forecasts are fully aligned with the business.
#2 No accountability
#3 Assumption stacking
The more uncertainty in your business, the fewer assumptions you should include in your forecast. If you add multiple variables on top of each other, their margin of error multiplies. Additionally, it’s much easier to analyze your business drivers if you isolate the variables.
#4 Skipping sensitivity analysi
It’s our job to quantify the risk of a forecast. That’s even more important when there is a lot of uncertainty. The easiest way to do that is by changing individual inputs and noting how much impact that has on the forecast.
#5 Showing only point estimate
Sometimes, analysts mistakenly assume ranges make it look like they aren’t confident in their forecast. However, a well-measured range is critical for two reasons:One, it shows the order of magnitude of uncertainty (i.e. risk) in the forecast.
And two, it enables scenario planning.
In sum, to level-up your forecasts:
-Remove bias by comparing top-down vs bottom-up
-Create accountability by aligning the forecast with the busine
-Higher uncertainty requires fewer assumption
-Estimate the risk by running a sensitivity analysis