What are the most important forecasting techniques in corporate FP&A?

USING AI FOR BUDGETING AI is extremely promising technology, but can we use it to make the budgeting process more efficient – and more effective? The short answer is YES and leading companies like Microsoft already are. Use AI to budget for “lesser” expense budgets such as office supplies, subscriptions, or even travel & entertainment. Use AI to predict Attrition rates. Apply those rates to assess how much the budgeted Salaries & Benefits should be adjusted downward. Use AI to develop the first pass of Sales Projections at whatever level of detail is most appropriate for your business. There are plenty of other examples, but this should provide some inspiration.

Trend Analysis is most common yet simple method of forecasting. Here we try to indentify the trends by going through the historicals to update the forecast numbers. Seasonality , geo- political changes or development , recent development and changes in the industry to which the company belongs and such other internal and external factors also should be taken into account as there are high chances to be omitted while forecasting based on trends analysis

One of the common techniques in forecasting in to use historical data and understand the trend. The trend can help us understand seasonality, macro economic development or any other factor impacting our business. Trend analysis alone cannot predict future as it only gives us directional view as such needs holistic research is required to implement forecast along with Trend analysis

FP&A forecasting's toolbox is full of shiny hammers, but the MVPs come in three flavors: 1. Driver-based models: These sleuths connect the dots between key factors (like marketing spend or economic trends) and your financial outcomes, giving you a dynamic roadmap. 2. Scenario planning: Think of it as a crystal ball with adjustable dials. Simulate different futures (boom times, market dips) to stress-test your strategy and build resilience. 3. Rolling forecasts: Ditch the static crystal ball for a live video feed. These forecasts continuously adapt to new data, keeping you nimble and ahead of the curve. Remember, the best technique is the one that fits your needs, so mix and match to see what forecasts the future brightest!

Trends analysis are critical for forecasting as a complementary tool, and can be directly used to provide ranges of outcomes. We live in a VULCA world where realities of the prior period are oftentimes not directly leverageable. However, it does provide a good comparison point vs your best forecast, irrespective of the methodology you followed.

The scenario approach is critical for forecasting ... especially to enable a stage gated approach for investments (and not to loose flexibility on costs / investments in case of lower than expected markets / volume).

Scenario analysis is a powerful tool for forecasting the financial impact of variable external factors. It is customary to start with a "base case" financial model (3 statement financial model together with critical assumptions), which showcases the most likely outcomes. A scenario will include assumptions of external factors and their translation into financial model assumptions. For example, in the case of an international trading firm, where the government imposes export restrictions, a scenario can show lower sales, lower inventory and staffing, and perhaps the use of an emergency banking facility to provide liquidity. In practice, a "best case" scenario and "worst case" scenario, is used in addition to a "base case" scenario.

Les scénarios contribuent à élargir la panoplie des prévisions suivant les hypothèses émises par les différentes parties prenantes dans l'élaboration de budgets et permettent ainsi d'établir des prévisions financières dans un spectre de variation limitée

Scenario analysis is a forecasting technique that involves developing multiple forecasts based on different assumptions about future events or conditions. This can help identify potential risks and opportunities that could impact the company's financial performance. For example, a company might develop scenarios for different economic growth rates, changes in customer demand, or new competitor entrants.

By identifying and modeling key drivers – be it volume, price, margin, or productivity – we could establish a logical link between the inputs and outputs, fostering a nuanced perspective on the business landscape. Driver-based forecasting enables FP&A teams to tell a holistic story about the company's future by integrating strategic and operational variables into the forecasting process.

Driver-based forecasting is a forecasting technique that focuses on the underlying drivers of financial performance. This involves identifying the factors that have the most significant impact on the company's financial metrics and then using those factors to develop forecasts. For example, a company might forecast revenue by using historical data on sales, marketing expenditures, and pricing.

Driver based modeling is very potent as a form of forecasting and budgeting. Considering that forecasting accuracy lies in the depth of a volume / price analysis, the drivers of both volume / price can yield significant insights towards better forecasting as well as understanding variance to budget, through a volume or price variance analysis.

Judgmental forecasting is a forecasting technique that relies on the judgment and expertise of experts. This can be helpful for forecasting metrics that are not well-suited for statistical analysis, such as new product launches or strategic initiatives. For example, a company might use judgmental forecasting to forecast the impact of a new marketing campaign on customer acquisition.

Hybrid forecasting is a forecasting technique that combines two or more different forecasting methods. This approach can be used to take advantage of the strengths of each method and overcome their limitations. For example, a company might use a combination of trend analysis, scenario analysis, and judgmental forecasting to develop a more comprehensive forecast.

Not mentioned in this section ... but moving away from budget as soon as the year starts and driving rolling forecasts is critical (at a minimum on quarterly basis, best in class on monthly basis).