How To Avoid The Most Common Forecasting Mistakes

Posted on:  November 18, 2022

Financial metrics

What Is Forecasting?

Forecasting is the process of making predictions based on past and present data. These informed estimates help determine the perceived direction of future trends. Because the future is always uncertain, forecasts must often be revised, and the actual results can vary greatly. The more accurate the forecasts, the more accurate the decisions. In business, the process of forecasting tries to make informed guesses or predictions about the future state of certain financial metrics such as growth, expenses, or economy-wide predictions. Managers use forecasting for internal purposes to best decide where to allocate resources.

Forecasting Limitations

The biggest limitation with forecasting is that it involves the future, which is fundamentally unknowable today. There is no guarantee what will happen tomorrow. As a result, forecasts can only be best-guesses. While there are ways to improve the reliability of forecasts, the assumptions and the data which is input, has to be correct. Otherwise, it’s garbage-in, garbage-out. And even when the data is correct, forecasting often relies on historical data, which can’t be guaranteed to be valid in the future. It’s also impossible to factor in anomaly issues, such as what we experienced during the heights of COVID or should there be a national disaster. While no forecast can be fool-proof, here’s a closer look at the most common forecasting mistakes & how to avoid them.

Top 6 Forecasting Errors

1. Basing Forecasting On Guesswork Or Gut Feel
Feelings and guesswork about the way sales are going are not the best indicator for what’s to come. When sales forecasts are based on hunches, opportunities are far less likely to close as predicted. Of course no forecast is perfect, but a prediction based on data and actual behaviors is always more accurate.
2. Failing To Understand The Customer’s Needs, History & Buying Patterns
The customer’s past performance is often the best indicator predictor of the future. Valuable data from past years are powerful indicators for what you can expect in a comparable forecast period. Knowing your customers’ needs will also validate the demand for any significant forecast divergence from past performance in the same period.
3. Lacking Understanding Of Purchasing Stages Within The Sales Cycle
It’s important to define these stages clearly and to identify the behaviors that signal transition from one stage to the next (e.g., taking a demo or getting a sales visit). Failure to clearly identify these stages distorts the forecasting accuracy.
4. Forecasting Just To Match Corporate Expectations
Forecasting numbers to appease management’s expectations is complaisant and inaccurate. It also shows lack of drive and knowledge of the customer’s expectations.
5. Relying On Siloed Data
Not having a full understanding of the market and the competitive landscape results in forecasts being created in a siloed vacuum. These are forecasts without vision and validation which then become inaccurate and misleading. This mistake can force businesses to experience excessive cash loss.
6. Not Using Technology
Technology makes forecasting easier and more automated, allowing business leaders to focus their valuable time and resources on making the best decisions for their organization. It also ensures 100% confidence in your data.

The Benefits of Technology

Every organization needs a software solution to maximize their reporting, budgeting and planning needs. A leading software solution, like Synoptix, will provide: 1. Flexibility & Accuracy – You should be able to quickly & easily change your budgets & forecasts on-the-fly to see the impact of decisions before making them. 2. Simplicity & Automation – Look for a solution that has a user-friendly interface & doesn’t require technical experts to create your reports & budgets. 3. Instant Visibility – You need a toll that provides real-time insights with the ability to drill-down into the details. 4. Streamlined Collaboration & Improved Communication – Information silos must be broken down & planning aligned across every department. A top-notch tool will improve communication among all departments.

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