What are the key differences between top-down and bottom-up forecasting approaches?

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Forecasting is a crucial skill for any business that wants to plan ahead and make informed decisions. But how do you choose the best method to forecast your sales, costs, or profits? In this article, we'll explain the key differences between two common forecasting approaches: top-down and bottom-up. We'll also discuss the advantages and disadvantages of each approach, and how to combine them for optimal results.

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1 Top-down forecasting

Top-down forecasting is a method that starts with the big picture and works its way down to the details. It uses historical data, market trends, industry benchmarks, and strategic goals to estimate the overall demand or revenue for a product, service, or business unit. Then, it allocates this estimate to smaller segments, such as regions, channels, or customers. Top-down forecasting is useful when you have limited data or time, or when you want to align your forecasts with your vision and objectives.

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Cath Zhao

Senior Business Analyst at Independent Living Specialists｜Career Coach｜Business Founder
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Top-down forecasting proves that sometimes, beginning with an overarching view can lead to accurate and efficient predictions, even in uncertain times.

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2 Bottom-up forecasting

Bottom-up forecasting is a method that starts with the details and works its way up to the big picture. It uses data from individual sources, such as salespeople, customers, or suppliers, to estimate the demand or revenue for each segment, product, or service. Then, it aggregates these estimates to get the total forecast for the business unit, market, or industry. Bottom-up forecasting is useful when you have reliable and granular data, or when you want to capture the variability and uncertainty of the market.

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3 Advantages of top-down forecasting

Top-down forecasting has several advantages over bottom-up forecasting. First, it is faster and simpler to implement, as it requires less data and analysis. Second, it is more consistent and coherent, as it reflects the strategic direction and assumptions of the management. Third, it is more scalable and flexible, as it can be easily adjusted to different scenarios or time horizons.

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4 Disadvantages of top-down forecasting

Top-down forecasting also has some drawbacks compared to bottom-up forecasting. First, it is less accurate and realistic, as it ignores the nuances and fluctuations of the market and the customers. Second, it is more prone to bias and error, as it relies on subjective judgments and extrapolations. Third, it is less transparent and accountable, as it does not involve the input and feedback of the stakeholders.

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5 Advantages of bottom-up forecasting

Bottom-up forecasting has several advantages over top-down forecasting. First, it is more accurate and realistic, as it reflects the actual data and behavior of the market and the customers. Second, it is more reliable and robust, as it reduces the impact of outliers and anomalies. Third, it is more transparent and accountable, as it involves the input and feedback of the stakeholders.

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6 Disadvantages of bottom-up forecasting

Bottom-up forecasting also has some drawbacks compared to top-down forecasting. First, it is slower and more complex to implement, as it requires more data and analysis. Second, it is more inconsistent and incoherent, as it may not align with the strategic direction and assumptions of the management. Third, it is less scalable and flexible, as it may be difficult to adjust to different scenarios or time horizons.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Rey San Pascual

Principal Consultant at Elemenopy Consulting
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In either approach - top down or bottom up, human eyes and critical thinking are key elements to ensure reasonable and realistic forecasts. There are still many external factors and relationships that have not been programmed into automated systems. A hurricane that occurred just yesterday would not have incorporated into your system overnight and reflected in the forecast generated this morning. Further, that hurricane may affect different product segments differently, increasing demand for some and increasing demand for others.

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What are the key differences between top-down and bottom-up forecasting approaches?

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1 Top-down forecasting

2 Bottom-up forecasting

3 Advantages of top-down forecasting

4 Disadvantages of top-down forecasting

5 Advantages of bottom-up forecasting

6 Disadvantages of bottom-up forecasting

7 Here’s what else to consider

Budgeting & Forecasting

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What are the key differences between top-down and bottom-up forecasting approaches?

1

2

3

4

5

6

7

1 Top-down forecasting

2 Bottom-up forecasting

3 Advantages of top-down forecasting

4 Disadvantages of top-down forecasting

5 Advantages of bottom-up forecasting

6 Disadvantages of bottom-up forecasting

7 Here’s what else to consider

Budgeting & Forecasting

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