Skip to main content
Home
The Online Resource for Modern FP&A Professionals
Please register to receive the latest FP&A news, updates and tips Login

Main menu

  • Home
  • FP&A Insights
    • FP&A Trends Digest
    • FP&A Trends Research
    • FP&A Trends Insight Paper
    • FP&A Trends Survey
    • Short Videos
    • Our Contributors
  • FP&A Events
    • International FP&A Board
    • FP&A Trends Webinars
    • Digital FP&A Circles
  • AI/ML Committee
    • Introduction
    • Members
    • Resources
    • Meetings
  • FP&A Tools
    • FP&A Trends Maturity Model
  • About Us
    • Company Policy
    • Privacy Policy
    • Editorial Guidelines
    • Our Ambassadors
    • Our Sponsors & Partners
    • Contact Us
image

FP&A Week: Breaking the Paradox

October 10-13, 2023

Register now

 

 

 

Five Methods for Unbiased Finance Forecasting
October 7, 2020

By Robert J. Zwerling and Jesper H. Sorensen, founders of the Finance Analytics Institute

The Authors

Robert J Zwerling and Jesper H Sorensen are the founders of the Finance Analytics Institute.

Mr. Zwerling is also Managing Director of Aurora Predictions, providing intuitive analytics with AI software for Finance and Operations.

Mr. Sorensen is also Senior Finance Director in a Fortune 100 technology company with a proven track record of advancing the analytics agenda.

To learn more about the Finance Analytics Institute please visit at www.fainstitute.com.

FP&A Tags
Modelling and Forecasting
Forecasting Quality
Financial Planning and Analysis

forecasting accuracy and biasHumans have personal and political pressures that pull at them and, therefore, they are biased towards something.

As long as there are humans involved in making a forecast, the forecast will be biased.

The key to making a forecast unbiased is to find a method where humans have minimal influence on the outcome.

There should be only ONE forecast 

The first rule of forecasting is to have a dialogue between finance and business to lock in one single forecast that is owned by both business and finance. Having multiple forecasts is not an option.

Although finance and business do not always agree on numbers, such an alignment can be supported through the use of unbiased forecasting when finance lets the “data talk” and leaves bias out.

Unbiased forecasting is a framework where finance uses multiple methods to forecast, which cannot be manipulated and, as such, are independent of personal opinions. These are the methods where historical data, market data, statistics or an industry index are examined, and forecast algorithms are applied to predict future outcomes. 

In this article, we will investigate five of those methods. Each of them has its own pros and cons.

Crowd Forecasting 

Crowd forecasting does not rely on a single individual but a whole group of people providing their own individual views of the future, thus, reducing the bias component. 

The variability of individual performance makes it hard to know which individual to trust. If you aggregate the forecasts of a crowd of people, you are much more likely to come up with a more accurate forecast on average.

With crowd forecasting, there are several pros and cons to consider:

  • Pro: It is a relatively easy starting point towards creating forecast validation models.
  • Con: It is not unbiased.
  • Con: The outcome is only as good as the average of the crowd’s opinion.

Competitive Intelligence

Understanding the competitive landscape can be used as an unbiased gauge to assess a forecast. Using the quarterly announcement from public companies is a guide to forecasts for the following quarters. If finance has noticed a pattern between its own performance and its competitor’s performance, those insights can be used to provide an unbiased forecast.

There are also some pros and cons with this method:

  • Pro: It is a way for finance to utilize external data sources to validate its own performance. 
  • Con: A perfect competitor doesn’t always exist. 

Linear Regression

A regression uses the historical relationship between an independent (often time) and a dependent variable, such as sales, revenue, etc., to predict the future values of the dependent variable.

  • Pro: Regression can be performed with most tools, including Excel as a simple scatterplot and adding a regression line. 
  • Pro/Con: This is a good option if the data is relatively linear, exponential, logarithmical, etc., but the framework cannot be used if the dependent variable is seasonal. 
  • Con: Regression should only be used to forecast if the R-square is higher than 0.85.

Smoothing & Moving Average

Smoothing and Moving average covers a number of different methods, including ARIMA, Holt-Winter, etc. These models are statistical techniques using historical time-series data and applying algorithms to predict future outcomes. 

  • Con: Running these models in Excel can be very time-consuming.
  • Con: To select the best model, all models need to be run. This means that a biased human will select the one he or she deems best. 
  • Pro: Analytics tools have major advantages to Excel and can be used for this method. They utilize artificial intelligence to find the best method among all models that has the best predictive capabilities. 

Leading Indicators

Leading indicators are industrial and economic metrics from which an indication of the value or direction of another variable (for example, a sales forecast) can be obtained. 

They are called "leading" because their direction or magnitude historically "leads" the focal variable. For example, we may find that the unemployment rate indicates (leads) the future of a company’s revenue. 

  • Con: Leading Indicators can be extremely difficult to find when using Excel, as you need to search through volumes of industrial and economic statistics to find correlations with your performance. 
  • Con: If a relationship is found, it could still change over time, so the leading indicator will no longer be leading. 
  • Pro: This forecasting method works best with analytics tools with artificial intelligence. 

Achieving Better Forecast Accuracy

If finance would like to achieve a higher forecast accuracy, it needs to:

  • Use unbiased forecasting together with business forecasts. Where multiple forecasts agree within a planning tolerance, there is a higher confidence in the outcome, and where they do not, there should follow a deeper discussion to sort through the risks.  
  • Use a variety of different unbiased methods. They are built from different data sources, including crowds of people, competitive intelligence, statistics and mathematical algorithms. 
  • Expand its toolbox beyond Excel to include advanced analytics systems and techniques that can challenge and influence business forecasts. The more advanced the tool in your toolkit, the more advanced Unbiased Forecasting you can produce. 

 

The ability of finance to provide unbiased recommendations both improves forecast accuracy and helps finance become a strategic partner to the business. 

The full text is available for registered users. Please register to view the rest of the article.
  • Log In
  • or
  • Register

Related articles

How Much Bias Is in Your Forecast?
August 5, 2019

Being critical of one’s own work, is even more important for the financial doing the forecast...

Read more
Statement Forecasting
Why 3-Statement Forecasting is not Enough
May 27, 2020

A forecast that simply assigns future values based on prior experiences is not a model. In...

Read more
Case Study
A 120-Year Old Sugar Company Learnt the Importance of Forecasting
May 13, 2020

Developing predictive models, forecasts and scenarios to assess risk and assist decision making is one of...

Read more
Explaining, Reporting and Forecasting Revenues Evolutions
November 21, 2019

Among FP&A challenges understanding, explaining and forecasting revenues evolutions are one of the top items. It...

Read more
How To Improve The Long-Range Forecast
September 3, 2019

The strength of those working in FP&A often comes when they worked in different industries or...

Read more
Modern Finance. Leveraging AI/Machine Learning in Decision Making
June 6, 2019

Takeshi Murakami, Group Controller at Microsoft, shares an interesting case study on leveraging AI/ML in decision-making. Microsoft...

Read more
+

Subscribe to
FP&A Trends Digest

We will regularly update you on the latest trends and developments in FP&A. Take the opportunity to have articles written by finance thought leaders delivered directly to your inbox; watch compelling webinars; connect with like-minded professionals; and become a part of our global community.

Create new account

image

The FP&A Trends Webinar: Navigating Intelligent Transformation with FP&A Trends Maturity Model

Click here to view details and register

 

 

 

 

Pagination

  • ‹‹ Previous
  • September 2023
  • Next ››
Su Mo Tu We Th Fr Sa
27
28
29
30
31
1
2
 
 
 
 
 
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Moving from FP&A to Extended Planning and Analysis (xP&A)
 
Moving from FP&A to Extended Planning and Analysis (xP&A)
 
24
25
26
27
28
29
30
Creating Your Transformation Map with the FP&A Trends Maturity Model
 
Using AI to Enhance Your Predictive Planning and Forecasting
 
All events for the year
Data and Analytics
Data & Analytics
FP&A Case Studies
FP&A Case Studies
FP&A Research
FP&A Research
General
General
Integrated FP&A
Integrated FP&A
People and Culture
People and Culture
Process
Process
Technology
Technology

Future Meetings

The Face-to-Face London FP&A Board
The Face-to-Face London FP&A Board Creating Your Transformation Map with the FP&A Trends Maturity Model
September 27, 2023
The FP&A Trends Webinar
The FP&A Trends Webinar Using AI to Enhance Your Predictive Planning and Forecasting
September 28, 2023
The Power of AI and Human Intelligence in FP&A
The FP&A Trends Webinar Empowered Decision-making: Human-Led, AI-Backed Intelligence in FP&A
October 4, 2023
The Face-to-Face Amsterdam FP&A Board
The Face-to-Face Amsterdam FP&A Board Five Critical Roles for Building a World-Class FP&A Team
October 5, 2023
ZBB
The FP&A Trends Webinar A New Age of Zero-Based Budgeting
October 10, 2023
The FP&A Trends Webinar
The FP&A Trends Webinar Navigating Intelligent Transformation with FP&A Trends Maturity Model
October 11, 2023
The Face-to-Face New York FP&A Board
The Face-to-Face New York FP&A Board FP&A Storytelling in a Data-Driven World
October 12, 2023
The Face-to-Face Toronto FP&A Board
The Face-to-Face Toronto FP&A Board FP&A Storytelling in a Data-Driven World
October 17, 2023
Value Adding FP&A
The FP&A Trends Webinar Mastering the Art and Science of Value Adding FP&A
October 18, 2023
FP&A Storytelling in a Data-Driven World
The Face-to-Face San Francisco FP&A Board FP&A Storytelling in a Data-Driven World
October 19, 2023
The Face-to-Face Seattle FP&A Board: FP&A Storytelling in a Data-Driven World
The Face-to-Face Seattle FP&A Board FP&A Storytelling in a Data-Driven World
October 24, 2023
The Face-to-Face Boston FP&A Board
The Face-to-Face Boston FP&A Board Creating Your Transformation Map with the FP&A Board Maturity Model
October 26, 2023
Geneva FP&A Board
The Face-to-Face Geneva FP&A Board FP&A Storytelling in a Data-Driven World
November 7, 2023
Continuous Planning
The FP&A Trends Webinar Real-Time and Continuous Planning: What Does It Involve
November 8, 2023
Zurich FP&A Board
The Face-to-Face Zurich FP&A Board FP&A Storytelling in a Data-Driven World
November 9, 2023
The Face-to-Face Munich FP&A Board
The Face-to-Face Munich FP&A Board Moving from FP&A to Extended Planning and Analysis (xP&A)
November 14, 2023
Helsinki
The Launch of the Face-to-Face Helsinki FP&A Board Modern Financial Planning and Analysis (FP&A): Latest Trends and Developments
November 16, 2023
From Insights to Impact: Unveiling the Potential of FP&A Scenario Management
The FP&A Trends Webinar From Insights to Impact: Unveiling the Potential of FP&A Scenario Management
November 22, 2023
The Launch of the Face-to-Face Riyadh FP&A Board
The Launch of the Face-to-Face Riyadh FP&A Board Modern Financial Planning and Analysis (FP&A): Latest Trends and Developments
November 27, 2023

Please register to receive the latest FP&A news, updates and tips.

info@fpa-trends.com​

              

Foot menu

  • FP&A Insights
  • FP&A Board
  • FP&A Videos

Footer countries

  • Amsterdam
  • Austin
  • Boston
  • Brisbane
  • Brussels
  • Chicago
  • Copenhagen
  • Dubai
  • Frankfurt
  • Geneva
  • Hong Kong
  • Houston
  • Kuala Lumpur
  • London Board
  • London(Circle)
  • Melbourne
  • Miami
  • Munich
  • New-York
  • Paris
  • Perth
  • San Francisco
  • Seattle
  • Shanghai
  • Singapore
  • Stockholm
  • Sydney
  • Tokyo
  • Toronto
  • Washington D.C.
  • Zurich

Copyright © 2023 fpa-trends.com. All rights reserved.

0