Six Rules For Effective Financial Forecasting: Part 1

Harvard Business Review Adaptive Planning Financial Forecasting Best Practices WhitepaperIn order to maximize the effectiveness of business analytics and corporate performance management (CPM) software, finance professionals also look for sources of best practices.

The Harvard Business Review’s “Six Rules for Effective Forecasting” is a useful document of best practices that any finance professional, in any industry, can use to uncover market trends and properly evaluate current forecasting processes. Below is an abbreviated summary of the first three tips. For the full story and more detailed insights, download the full white paper here.

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1. Define A Cone of Uncertainty

Harvard Business Review Adaptive Planning Financial Forecasting Best Practices WhitepaperThis is an exercise in strategic judgment. Good forecasting starts with a broad list of uncertainties; from those most likely to occur, to other highly improbable factors. Determine the most likely events and place them in the center of the cone and expand out, placing the most unlikely on the outer edge. Because financial forecasting should be a fluid, continuous process, you can narrow down your cone later. Starting with a broad view ensures that you don’t miss key scenarios and are caught off guard down the road.

2. Look For The S-Curve

Harvard Business Review Adaptive Planning Financial Forecasting Best Practices WhitepaperThe most influential trends, business or otherwise, typically follow an S-curve, meaning change starts slowly before growing exponentially. In the end, the trend will taper off and slightly drop down. Great forecasters can identify the precursors of the S-curve and stay at the forefront of their markets. They also realize that exponential change takes time, so they’re disciplined enough to stay the course.

3. Embrace The Things That Don’t Fit 

Harvard Business Review Adaptive Planning Financial Forecasting Best Practices WhitepaperHow do you identify the S-Curve? Look for indicators that don’t fit within the state of your current market. Individually, these indicators may appear weak. In aggregate they can be a powerful sign of things to come. Natural human instinct is to disregard things that don’t fit because we dislike uncertainty and are fixated on present conditions. But think of it this way: by definition, things that are truly new won’t fit into pre-existing categories.

Click here for Part 2 of the Harvard Business Review’s Rules for Effective Forecasting.

Download the Six Rules for Effective Forecasting white paper to learn more forecasting tips and best practices.

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