WHAT IS PREDICTIVE FORECASTING?
Predictive forecasting involves the analysis of historical data to identify general patterns that can be used to predict the likely future. This can generate insights that allow companies to make informed business decisions based on factual data rather than a person’s gut feelings.
COMMON APPLICATION AREAS
Predictive forecasting can be used in several areas, for instance by charting people’s purchasing patterns to provide relevant and targeted offers to different customer categories. Another application area is to use risk analysis to assess a customer’s creditworthiness and thus predict which customers are likely to be bad at paying their bills, thus avoiding potential credit losses. Within the finance function predictive analysis can be used to form a picture of what the revenues and costs of different units, such as cost centres and subsidiaries, are likely to be even before these figures are reported.
PREDICTIVE FORECASTING IN TODAY’S PLANNING SOLUTIONS
One part of today’s predictive planning solutions features built-in functionality for predictive forecasting. This applies for instance to calculations about trends and seasonal variations that are included as standard and where historical data is used to calculate what the future is likely to bring. It is also possible to add more advanced predictive models where other kinds of calculations can be taken into account when calculating the most probable forecast. This may be relevant when known future changes will occur but where there is no historical data, for example when companies within a group are acquired, merged or sold or when new products are to be launched and marketed.
When a classic budget or forecast is performed according to the bottom-up principle, it may be difficult for the economy function to assess its reasonableness since it is the various departments that have the necessary information about their particular part of the operation. This also means it can be difficult to know what financial margins there are in the budget or forecast period at company or group level. With the help of predictive forecasting the economy function gets informed support that provides an opportunity to challenge the planning that is undertaken manually in an organisation. Excessive discrepancies between the manual and predictive forecast should have an explanation in the form of a change in the operation if they are to be regarded as reasonable. However, it is necessary to take into account that it is actually the people in the organisation who have the necessary expertise about the operation and the customers, but that the predictive forecast can provide insights that may be of use when taking a decision. The use of historical data to predict a future trend is an entirely new way of working, offering potential for challenging manual planning in an organisation.
If you would like further discussion on how predictive forecasting can improve your budget and forecasting process, please send an email to: firstname.lastname@example.org