Growing demand for improved forecasting capabilities is leading companies to more closely track the material impact external factors are having on company forecasts, according to a recent Hackett Group study.

“Driver-based modeling has traditionally worked well on expense-based factors, but it’s more difficult when you look at the revenue line where external factors can have a more material impact,” says Sean Kracklauer, president of advisory services and research for The Hackett Group.

Correctly identifying external factors and incorporating them into company forecasting models is becoming a top finance priority as more companies look to improve for forecasting capabilities, Kracklauer explains.

According to the Hackett Group’s 2010 Finance Book of Numbers, finance executives have identified the improvement of forecasting capabilities as the number one priority of the finance function in 2010. The improvement of forecasting capabilities was followed by “end-to-end cash management” and “more impactful decision support.” Hackett Slides

Whereas traditional forecast models have done good job of incorporating “historical actuals,” they have not always peered deeper into the external events that have shaped historical trends. One example Kracklauer uses to illustrate this point is a traditional forecasting model that had been used by a large brewery. While the forecasting model allowed the brewery to stay in step with the seasonality of its sales to distributors, the model from time to time failed to predict large swings in revenue triggered by sporting events.

“What they found was that major sporting events were having a material impact on their sales in different regions and that the distributors they relied on for information often had only a local view and failed to see the big picture,” says Kracklauer. ###