Understanding Your Forecast

Juan Porter

November 18th, 2011

Rolling forecasts usually place a heavy focus on variance analysis. Analyzing forecast variances and overall accuracy is a key for identifying opportunities to review, streamline and improve your process. Variances also provide insight into the cause-and-effect relationships that impact the organization. You can use this information to understand what that difference means to the business and then make appropriate adjustments and course corrections.

Understand Why There is a Variance

Evaluating variances takes thought. Although variance analysis can be very complex, the main guide is common sense. Positive variances aren’t always positive. Say you have a positive variance of $10,000 in advertising. Is this good or bad news? On the plus side, you’ve saved $10,000. On the minus side, you did not place advertising. Now you take a look at your sales numbers and see they are way below expectations for the same period you did not spend your advertising budget. The question to ask here is: Could the lack of advertising be the cause for lower sales?

In general, underspending is a positive variance, and overspending is a negative variance. But the real test was the result good for business?

The bottom line is every variance should stimulate questions like:

  • Why did a project cost more or less than anticipated?
    • Was it budgeted for correctly?
    • Were objectives met?
    • Did we get the expected results?
  • Does a positive variance mean money saved or a failure to act?
  • Does a negative variance indicate a change in plans, a management failure, or an unrealistic budget?

Questions like these provide visibility into assumptions and dependencies.

Once you’ve analyzed your variances, answered your questions, and identified assumptions and dependencies, a best practice is to track and store comments/ explanations. This will help you do a more comprehensive analysis of future variances.

It is also important to make sure that currency fluctuations do not skew your variance analysis. As a result, it is important to analyze the variances in local currency. This will be the “language” most familiar to the location, geography, etc., and by doing so you can usually get to what are the root causes of the variances.

In many cases it is just as important to analyze the variances in a standard reporting currency (ex: USD). If so, then you can eliminate variances in currency fluctuations by using a constant rate (ex: Actual @ Plan rates, Prior Estimate @ Current Estimate rates).

Beyond the Numbers

The best way to understand your forecast is to expand the type of reports you work with. Don’t rely on just Actual vs. Budget (AvB) type reports, generate reports that let you “visually” see what’s happening. Use graphs and charts to spot trends. Bar, Line, Pie, Bubble, Scatter can provide management with significant information—e.g., identifying trends, contribution, and outliers. Without this data, some of these important questions might go unasked.

Waterfall reports are another useful way to measure accuracy and effectiveness in forecasting. These reports look at KPI and reporting metrics and are help in identifying trends and behaviors in those that are preparing the forecasts.

For planning and forecasting never has the old adage “You can’t manage what you can’t measure,” been more true. To make sure you have the information you need to manage, the information has to be not only right but relevant.

We started this series discussing the benefits of rolling forecasts as an approach allows you to look both backward and forward, providing a richer view for better decision-making. And in today’s rapidly changing economy, businesses in a position to respond quickly are in the best position to succeed. Because rolling forecasts emphasize ongoing results in addition to the current fiscal year, offering more visibility and balance, you always have up-to-the minute data for decision-making. And by having a finger on the pulse of changing conditions, you can quickly refocus the business accordingly—e.g., make instant decisions on what is working, what’s not working, where to invest, etc.


This is Part IV of a four-part blog series on rolling forecasts:

Part I – Transition Traditional Forecasting to Rolling Forecasts

Part II – Implementing Rolling Forecasts

Part III – Advanced Methods in Rolling Forecasts

Part IV –  Understanding Your Forecast

Download E-book: Rolling Forecasts in Four Parts

Juan Porter

About Juan Porter

Juan Porter, Chief Solutions Officer, founded TopDown Consulting in 2000. He has over 30 years combined customer, vendor, and consultant experience with Hyperion, which enables him to bring unmatched insight into the strategic impact of performance management solutions as well as in-depth understanding of the day-to-day realities of managing global applications while supporting users’ needs. Prior to founding TopDown, Juan managed all aspects of Hyperion applications, on a global basis, for ABB, Novell, and SGI. He is considered a visionary with an exceptional, proven ability to effectively address complex global business problems through EPM solutions. He has served as a member of the Oracle Hyperion Partner Advisory Council, was the chair of Hyperion’s national steering committee, and has led many Hyperion enhancement committees and user groups. Recognized as a thought leader, Juan presents regularly at various industry events, including Kscope, Budgeting and Finance Summits, and Oracle EPM/BI Days. He has also authored a number of articles and blogs for various industry publications.

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