Why you need to have both: a top-down and a bottom-up forecast
Image by Susan Q Yin via UnsplashIf you only do one, you are not only losing out on accuracy. You are also robbing yourself of high-value conversations.
See, top-down forecasts are typically done by Finance or senior leadership. They start with the result in mind, the performance the company should be able to achieve.
Then you reason down from there, forecasting each relevant business driver. That’s pricing, new customers, the impact of advertising, promotion, innovation, and so on.
On the other hand, bottom-up forecasts should be prepared by the commercial teams. They are your marketing, sales, growth, or product teams.
You start from scratch, evaluating the expected impact of each major project or initiative individually.
The advantages of doing both types of forecasts are two-fold:
1️⃣ You can de-bias your forecast
Most of the time, top-down forecasts lean to the aggressive side. That’s because they are prepared by leaders who are somewhat removed from day-to-day operations on the ground. Additionally, reasoning down from the end result typically means people are more optimistic than they would be otherwise.
Bottom-up forecasts tend to have the opposite bias. This is because they are prepared by the people who are responsible for delivering them. Most of the time that means they are conservative to increase the chances of exceeding expectations.
Then, by comparing the aggressive top-down with the conservative bottom-up, one can find a happy medium that is often more accurate than each plan individually.
2️⃣ You’ll have discussions that drive the business forward
If top-down and bottom-up are relatively far apart (as they usually are), the preparers of each one need to sit down together and discuss the differences.
That’s a fantastic opportunity to encourage people to think outside the box. By explaining (and justifying) step-by-step how you reached the number you proposed, you have the chance to think deeper than you did before. In my experience, that process alone leads to new ideas and opportunities down the line.
To summarize:
➣ Finance or leadership teams create aggressive-leaning top-down forecasts by evaluating internal and external business drivers.
➣ Commercial teams forecast each project individually, which adds up to a conservative-leaning bottom-up plan.
➣ Comparing the two and discussing the differences leads to higher accuracy and new ideas to improve the results.
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