What not to do when forecasting

Antonio Franco Coaguila Gonzales

In a changing and volatile business world, like the one we are right now, companies of

all types and sizes need to know or at least have a brief vision of what can happen to its

business in the next weeks, months or years. Companies know they must take into account

different factors, scenarios or available information since a minimum information ignored can

be the difference between the success and failure of them. This is where the forecasts come to

carve, which can be defined as a method to translate past experiences and present relevant

information to future estimations to help managers to understand what to do next in order to

achieve the company goals or face sudden market changes (Lakhani and Kleiner, 2014).

Using forecasting implies analyzing all future business possibilities to help the companys

decision-making process and therefore develop the best strategies to face the future.

The importance of business forecasting is in a constant rise because managers know

that they cannot rely on good feelings, good luck or even chance when dealing with the

business environment. As explained before, forecasting uses relevant information and

delivers important facts and estimations that are helpful for managers to make strategic

decisions and therefore its value lies in the fact that it reduces the uncertainty of the

managers decision-making, even if it cannot eliminate it because of the always changing

environment and its factors. Urban transit authorities, government, hospitals, educational

institutions and many other types of organizations depend on forecast on one form or another

and therefore it become a process of learning. Dahl (2013) stated that an accurate forecast

guides management through established measurement, making easier the planning process

and goal-setting, and more important to make a plan with the aim of avoiding risks and help

the company to achieve its goals and meet its milestones.

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As forecasting takes an important part on business planning, companies must be

aware of how to set the right parameters or how to choose the right model when forecasting,

it may seem easy to do but the reality is that mistakes are always done when doing it, those

mistakes goes from basic to really complex ones, and it can lead to fatal business results. On

the other hand making accurate forecast leads to great results as improving sales and revenue,

being prepared for change at the right time or getting competitive advantage over direct

competitors. So taking as a reference the research made by Gilliland (2010) this essay will

identify and expose four of the biggest mistakes companies do when forecasting: rely only on

instincts, not refine forecasts, treat forecast as a promise and not involve the necessary

people; in every mistake explained it would be provided a golden rule to avoid it and finally

some conclusions will be established.

As mentioned before, the first mistake made by companies when forecasting is to rely

only on instincts. Relying on instincts, good feelings or intuition instead of statistical,

historical and real data, future behaviours of clients, market patterns or other relevant

information is going to make the forecast fail on its aim and therefore set and follow incorrect

strategies. Managers have to find out which aspects are related to their business and which

ones present a pattern of behavior that must be taken into account and be interpreted when

elaborating the forecast. Companies must focus on using real and measurable data first and

then maybe can consider using their instincts (Superville and Yorke, 2013). Focusing only on

instincts is an indicative that the company has an ineffective system of data collecting or

tracking and therefore future calculation done by the company will not be accurate and will

lead to failure. Even though forecasting will not be 100% accurate and there is no guarantee

that future estimations will happen, predictions made using market patterns, trends and

historical data will always outpace the ones based on feelings, instincts and hunches (Sinha,

2016). The first proposed golden rule to avoid this mistake is that all assumptions that
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someone can have when forecasting should be based and backed up with real data and

information from a reliable source and that can be verifiable (Sullivan, n.d.).

Second big mistake to avoid is not refining the forecasts. Forecasting is not a job that

ends up when having the final report; in fact it is an always-evolving practice (Daisyme,

2015), it uses external information that must be worked out continuously and not only one

time. Market trends, marketplaces, technology and customer behavior are always changing

and a company must be aware of this and translate it into the forecasting. Whether the

forecast is monthly, quarterly or annual, information can always become out of date from one

day to the next one and keeping track of the different circumstances or new information,

which appears daily and can affect the forecast, is mandatory to achieve the projected

business goals. Forecasting must be a real-time practice that shows how the business is going

on by recording every change involved and therefore adapting the forecast (SalesForce UK,

2014). It does not mean that the forecast should be revised and refined every day; in fact it

can be harmful for the company as it can lead it to the wrong business path, which is why

forecast revisions must be strategically programmed. To avoid being surprised by some

sudden change in the market, the second golden rule proposed is that forecast must be refined

and adjusted no matter the time and the industry the company is in as long as it is scheduled.

Treat the forecast like a promise is the third mistake to avoid if the company wants to

achieve success. According to Makridakis (1985) Forecasting should not be viewed as a

substitute for prophecy, but rather as the best way of identifying and extrapolating established

patterns or relationships in order to forecast (p. 16). In reference to the previous affirmation,

forecast is not a promise that something will be done or will happen, working with this

assumption in mind makes the company operate within limits and not allow it to develop its

business, this leads to and inadequate way of working that will end in failure. Although a

forecast is not perfect since it is impossible to know what will happen in the future with
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certainty, the added value of this tool is to interpret all the factors of the internal or external

environment involved and put this interpretation into an strategic plan. Managers must be

aware that no matter making a great forecast, the changing business environment leads to put

together a contingency plan to do in the case the forecast does not present the expected results

in the appropriate time. For this reason the third proposed golden rule is that companies must

see forecast as a reference or guideline to follow to carry out its operations and not as a rule

of what to do and what it is going to happen.

Keeping on the topic, the fourth mistake is not involving all necessary people when

forecasting. Something commonly done in companies is that the job of forecasting falls on a

single person depending on the companys business. Managers cannot do this because

forecasting involves teamwork; Dahl (2013) refers that best practices of forecasting implies

getting involved as many people as possible so the forecast would be as accurate as possible,

however I must refute part of this statement or at least complement it given the fact that it is

not only important to involve as many people as possible but to involve the right people.

The forecasting process needs that managers involve people with the necessary expertise and

knowledge or also people with easy information access as forecast depends on the

information flow (Demand Management System, n.d.); as example in the process of

forecasting sales, the ones that are involved normally are the sales people but without the

expertise of the production area huge mistakes can be done simply by ignoring some

information that must be shared along the process of forecasting as production capacity or

labour restrictions. To avoid the mistake shown before, the fourth golden rule is to involve

the right people to get the most accurate possible forecast and to promote active

communication throughout the whole process of forecasting.

Having written about four of the biggest mistakes companies do when forecasting,

and with the sufficient bibliography investigated, I would encourage adding one more
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mistake: replacing planning with forecasting. Have you ever heard a technical director of a

football team tell its football team: this year we are projecting to win 10 matches and lose

8? No, because its job is not to forecast the performance of the team, its job is to win games;

so he has to plan what to do to achieve the team goals. The same scenario happens in

business when forecasting overshadows or even replaces business planning (Serven, 2017,

p. 36). The biggest mistake is to think that forecasting is equal to planning when in fact there

is a wide difference. Business planning implies to draft plans of what should be done

therefore everything relate to the before acting, in other words decide what has to be done

tomorrow (Surbhi, 2017). On the other hand as explained before forecasting is a projection

about what can happen in the future. So the fifth golden rule on accurate forecasting is that

managers must difference both concepts, as forecasting is not planning but part of the process

of planning.

Finally, as explained, mistakes can be done by anyone when forecasting but the real

deal is not to make any but to learn from them. Managers not only have to measure which

were their forecast errors, but keep an eye open on those mistakes and evaluate if the

company is getting better or worse on its forecasting process. About the mentioned before,

Lakhani and Kleiner (2014) affirm that good forecasting process will accept that errors will

exist; so particular attention should be directed toward developing appropriate plans to

manage errors (p.30). Learning from mistakes or errors is the best way to improve the

companys forecasting process.

To conclude I have heard sometimes that companies must work in a smarter way and

not in a harder one, so they must not think on forecasting as a goal but as a mean to achieve

them. Forecasting is not only a science or an art; in fact it is a combination of both; it is a

really useful tool and managers have to apply it the better way they can to achieve the better

business results.
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References

Dahl, D. (May 23th, 2013). Why Forecasting Leads To Success In Your Business. Retrieved

from https://www.forbes.com/sites/fedex/2013/05/23/why-forecasting-leads-to-

success-in-your-business/#705d459054a8

Daisyme, P. (April 29th, 2015). How to Forecast Demand the Right Way. Retrieved from

https://www.entrepreneur.com/article/244823

Demand Management System (n.d.). 5 ways to Improve Your Forecast Accuracy. Retrieved

from http://www.demandmgmt.com/home/white-papers/5-ways-to-improve-your-

forecast-accuracy/

Gilliland, M. (2010). The business forecasting deal. New Jersey: John Wiley & Sons.

Lakhani, S., & Kleiner, B. H. (2014). Improving business Forecasting. Industrial

Management, 56(2), 26-30.

Makridakis, S. (1985). The art and science of forecasting: an assessment and future

directions. Paris: INSEAD.

SalesForce UK (August 18th, 2014). 7 of the Most Common Mistakes in Sales Forecasting.

Retrieved from https://www.salesforce.com/uk/blog/2014/08/7-mistakes-in-sales-

forecasting.html

Serven, L. (2017). Is Forecasting Destroying Your Planning Process? Strategic Finance,

99(1), 34-39.

Sinha, S. (June 15th, 2016). 7 Deadly Sales Forecasting Mistakes you must Avoid. Retrieved

from https://www.insidesalesbox.com/blog/7-deadly-sales-forecasting-mistakes-you-

must-avoid

Sullivan, M. (n.d.). 7 Mistakes to Avoid When Projecting Revenue. Retrieved from

https://quickbooks.intuit.com/r/forecasting/7-mistakes-to-avoid-when-projecting-

revenue/
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Superville, C. R., & Yorke, G. (2013). Tracking Signals In Business Forecasting. Franklin

Business & Law Journal, 1(3), 1-11.

Surbhi, S. (March 15th, 2017). Difference Between Forecasting and Planning. Retrieved from

http://keydifferences.com/difference-between-forecasting-and-planning.html