Forecasting

Methods

By Apurva Dhar
What is Forecasting

– Forecasting is a technique to establish relationships and trends which can be

projected into the future, based on historical data and certain assumptions.
– Financial forecasting is the process of estimating or predicting how a business will
perform in the future. It is an estimate of future financial outcomes for a company.
– It helps to estimate future income and expenses for a business over a period,
generally the next year which are used to develop projections for profit and loss
statements, balance sheets, burn rate, and other cash flow forecasts.
– It uses historical accounting and sales data, and external market and economic
indicators, to predict what will happen to the company in financial terms over the
given period.
Methods of Forecasting

There are three main methods of financial forecasting in Excel:

 MOVING AVERAGE
 EXPONENTIAL SMOOTHING
LINEAR REGRESSION
Moving Average

 A moving average is a technique to get an overall idea of the trends in a

data set. It is an average of any subset of numbers.
 The moving average is extremely useful for forecasting long-term trends.
You can calculate it for any period.
 It is a method used to smooth out the trend in data (i.e. time series).
 The idea is to filter out the micro deviations in a sample time range, to
see the longer-term trend that might affect future results.
 The simplest form of a moving average is calculated by taking the
arithmetic mean of a given set of values.
Exponential Smoothing

 Another method for forecasting in Excel is Exponential Smoothing. Exponential

Smoothing, like Moving Averages, is based on smoothing past data trends. However,
this algorithm performs smoothing by detecting seasonality patterns and confidence
intervals.
 It is one of the top 3 sales forecasting methods used in statistics filed.
 It is more realistic forecasting method to get the better picture of the business.
 Its logic will be the same as other forecasting methods but this method works on the
basis of weighted averaging factors. The older the data the less weight or less priority it
has and for fresher data or for relevant data it given more priority or weight.
 Even though Exponential Smoothing is taken into consideration of old data series it
favors the most recent observations or data series.
Linear Regression

 Linear regression is used to estimate the relationships between two or

more variables:
1. Dependent variable (criterion variable) is the main factor you are
trying to understand and predict.
2. Independent variables (explanatory variables, or predictors) are the
factors that might influence the dependent variable.
 It helps you understand how the dependent variable changes when one of
the independent variables varies and allows to mathematically determine
which of those variables really has an impact.
THANK YOU