Forecasting. It's Here to Stay: 5 Things Everyone Should Know
Orthotics & Prosthetics
on March 03, 2023
By Brynn Prier, Data Analyst II, VGM & Associates, and Ryan Weber, Data Analyst, VGM & Associates
Forecasting. It’s one of the biggest buzzwords in the data world today, and it’s only going to grow throughout the next year and beyond. Using data to better predict outcomes in the future is going to remain a hot topic in 2023 as it continues to increase in demand by companies everywhere.
There are many aspects of a business that can use forecasting to help leaders make more informed business decisions. Whether it’s using market research to predict how many people will buy or use a product, or if it’s utilizing historical sales data to predict the success of the business for years to come. Forecasting is everywhere.
So, why forecast anyway? What is the benefit to the business? For one, forecasting helps us more accurately set goals, plan, and create budgets. It allows us the ability to anticipate potential change within the market so we can revise our strategies and modify operations if necessary. It gives us the opportunity to learn even more about our customers and their behaviors so we can better serve them. The list goes on and on, but the point remains the same: Forecasting is here to stay. And there are five fundamentals you need to know.
The Five Fundamentals of Forecasting
- Determine the Question
- Know Your Data
- Understand Your Limitations and Resources
- Beware of Outliers
- Display the Results and Monitor Accuracy
Whether you’re a forecasting veteran or new to the process, these fundamentals will serve you well as you plot a course for business growth. Let’s take a look at each one to determine what it means and how it will help you lay a solid foundation for your forecasts.
1. Determine the Question
What are you attempting to predict? What question(s) are you ultimately trying to answer with your forecast? These are the questions to consider before diving in and gathering all the data needed to create your model. You need to identify the specific variables and timeframes that are most relevant in predicting your bottom line.
For example, when building revenue projections, you may want to look at various product lines and their sales performance over the last few years. Depending on the maturity of your data, it may not be relevant to look at data from 10 years ago. There may also be a product that has become irrelevant over time and no longer useful in predicting future values. It’s important to continuously re-evaluate your original question to make sure your variables and timeframes still align.
2. Know Your Data
It may seem obvious, but taking the time to truly know and understand your data is crucial to the overall reliability and confidence that yourself and others will have in the final product. You want to be able to answer the following questions:
- What granularity do you need the data to be?
- Is it yearly, quarterly, monthly, or daily?
- What level of results do you need?
- Do you want an overall bottom-line forecast, or should it be broken out by a specific variable?
It is beneficial to structure the data from the beginning so that you can answer these questions. Being able to nail down your original question at the start makes it easier when you begin collecting the data. You want to have all your i’s dotted and t’s crossed before diving into model creation so that you have a solid foundation from which to build.
3. Understand Your Limitations and Resources
We know that everyone wants their forecasts to be as accurate as possible, and it may be tempting to look at the latest and greatest technological advancements. However, you need to first take inventory of your personnel to be sure you have the people in place to utilize those tools to their full capacity before moving forward on the new and shiny object. It is also important to fully understand which tools you truly need for the forecast to be successful. Consider the following:
3 Questions to Help You Select the Right Forecasting Tools
- Where are you pulling your data from?
- Where are you importing it to?
- How are you distributing it?
The answers to those questions could potentially be three separate applications, and you need to know how and when to use them all. It doesn’t matter where you start if you continue making minor enhancements and improvements along the way.
4. Beware of Outliers
When building forecasts, we are typically trying to predict ranges rather than exact data points.
5. Display the Results and Monitor Accuracy
After the final model is complete and your forecast is in production, it is time to share it with the business.
The idea of forecasting can be intimidating, especially with all the new technologies out there that appear to predict anything and everything these days. But even with all these new advancements, it’s still important to know how forecasting works at its core so it can be used to its full potential and find ways in which we can improve the accuracy of its predictions. By breaking it down into these five fundamentals, you can make forecasting something that’s both attainable and manageable for all.
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This article was originally featured in the VGM Playbook: Forecasting 2023. To read the full article and more like this, download your copy of the playbook today!