In today’s fast-paced business environment, effective forecasting is essential for informed decision-making. So how can you create forecasts that truly drive decisions?
Julio Martínez, Abacum Co-founder and CEO, and Christian Wattig, FP&A Educator, recently joined forces to answer this question. With their combined expertise and extensive experience, Julio and Christian defined three approaches that the best FP&A teams are using:
Bottom-up and top-down combined
Actionable driver-based forecasting
Rolling forecasts with a narrow focus
In this article, we’ll take a look at each approach and how they impact strategic decision-making across the business. Don’t miss out on their full conversation for more firsthand forecasting insights as well as strategies you can use to become a better business partner.
Key Takeaways from this Article |
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Why Should Forecasting Matter for Your Business?
Forecasting is essential for organizations seeking to allocate resources effectively and identify emerging opportunities.
By anticipating trends and potential obstacles, FP&A (Financial Planning and Analysis) teams can influence strategic decisions that shape both immediate actions and long-term growth.
According to Financial Executives International, organizations using data-driven forecasts achieve 10% higher profitability and 50% faster budget cycles compared to reactive approaches.
What is Top-Down Forecasting?
Top-down forecasting starts with a high-level, macroeconomic view of the market.
This approach begins by estimating the total addressable market (TAM) and then narrows it down to predict a company's potential market share. It relies on external data such as economic indicators, market research, and industry benchmarks to create a forecast.
Leadership teams often use top-down forecasting to set strategic goals and align the company's direction with broader market trends. This method is particularly useful for new businesses without historical sales data or for companies entering new markets.
The primary benefit of top-down forecasting is its speed and strategic perspective. However, it can sometimes overlook operational constraints or the specific capacity of the sales team.
What is Bottom-Up Forecasting?
Bottom-up forecasting builds a forecast from the ground up, starting with granular data from individual components of the business.
This includes sales reps' quotas, product lines, or customer segments. These individual forecasts are then aggregated to create a comprehensive, company-wide prediction.
Bottom-up forecasting is grounded in operational reality, leveraging internal historical data and the knowledge of front-line teams. Its main advantages are higher accuracy and detailed insights for resource allocation.
However, this approach can be time-consuming and may sometimes fail to account for high-level market shifts or competitive pressures.
Forecasting Approach 1: Bottom-up and top-down forecasting combined
Combining top-down and bottom-up forecasting ensures that your forecasts are both aspirational and grounded in operational realities.
According to Wharton research, during economic turbulence, companies using combined forecasting methods reduced prediction errors by 15.4% for high-variability time series and 20.6% for stable datasets.
“The magic happens in that conversation where both of them meet.”
If you consider bottom-up and top-down forecasting to exist at opposite ends of a spectrum, “the magic happens in that conversation where both of them meet,” says Julio. “This is where the FP&A team is really driving better decisions for the company.”
Top-down forecasting | Bottom-up forecasting |
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Prepared by people who are further removed from the business | Prepared by the people responsible for executing against them |
Created with the end result in mind | Started from scratch with a blank slate |
More aggressive to align with leadership’s ambitious plans | More conservative to ensure expectations can be met |
Christian explains: “Most likely, your top down sales forecast will be higher than your bottom up sales forecast, for example. And that’s a fantastic conversation starter, because you can go to the Head of Sales and say, look, we’ve done the top down and arrived at a different conclusion. Why don’t we sit down and compare our assumptions to understand the difference?”
By creating space for conversations that align leadership’s strategic objectives with practical insights from the business teams on the ground, you can prepare forecasts that are realistic and achievable.
Key benefits
Encourages alignment between leadership’s strategic vision and practical operational insights.
Balances ambitious targets with on-the-ground realities for more accurate forecasting.
Sparks meaningful dialogue to uncover and reconcile any assumption gaps.
Potential challenges
Requires continuous collaboration between executives and department heads.
Demands time to resolve discrepancies between top-down aspirations and bottom-up data.
Potential for conflict if leadership’s goals are significantly higher than feasible outcomes.
Forecasting Approach 2: Actionable driver-based forecasting
Driver-based forecasting connects financial outcomes directly to key business drivers, allowing for more precise and actionable forecasts.
By focusing on the main factors that impact business performance, companies can more effectively manage risks and make informed decisions.
According to FPA Trends, companies using driver-based scenarios during the 2023 banking crisis adjusted capital expenditure 30 days faster than peers using static models.
“A model that’s easy to maintain, understand, and keep up to date.”
Christian shares: “Driver-based forecasting is one of my absolute favorite forecasting techniques because it’s so useful for decision-making and agility. It’s a powerful forecasting method that combines deep business understanding with a model that is easy to maintain, understand, and keep up to date.”
For example: It may happen that you say, 4 million new subscriptions in 2023. But the expectations from the board, investors and senior leaders is that you need to get more than that; at least 4,200.
[Figures in ‘000 subscriptions] | Conservative | Balanced | Aggressive | Agg vs. Bal |
|---|---|---|---|---|
2022 subscriptions | 3,397 | 3,397 | 3,397 | |
Unaided awareness increase @ +2% / +3% / +4% | 192 | 288 | 384 | 96 |
Direct response budget increase @ 25% & ’22 E/R | 645 | 645 | 645 | 0 |
Inflation (0% / 10% / 20%) | -72 | -64 | -57 | 7 |
Net promo strategy (reduced) | -52 | -41 | 0 | 41 |
Do-nothing conversation rate change @ -3% / -1% / 0% | -28 | -9 | 0 | 9 |
Less COVID one-time impact @ 75% / 50% / 25% | -308 | -205 | -20 | 185 |
2023 subscriptions | 3,774 | 4,010 | 4,348 | 339 |
With a driver-based forecast, you don’t need to go back to the drawing board because you can discuss the drivers that you feel more comfortable taking a risk in. This story becomes very easy to tell because you can show the board investors that, because you believe in unaided awareness and less impact on inflation, it’s a calculated risk.
Make sure you watch the full video for Christian’s step-by-step example of driver-based forecasting for a SaaS company.
Key benefits
Offers clear visibility into how key operational drivers translate to financial outcomes.
Facilitates scenario planning, making it easier to pivot when market conditions change.
Streamlines model maintenance by focusing on the most critical inputs.
Potential challenges
Requires thorough understanding of which drivers truly impact performance.
Complex or changing businesses might find it hard to prioritize the right drivers.
Over-reliance on driver assumptions can lead to inaccurate forecasts if the drivers aren’t validated.
Forecasting Approach 3: Rolling forecasts with a narrow focus
Rolling forecasts provide ongoing visibility and adaptability, which are crucial in a rapidly changing business environment.
“Narrow the focus to parts of the business that really move the needle.”
Christian recommends using rolling forecasts when it makes sense, but never as a replacement for annual planning. Maintaining a balance with traditional annual planning processes ensures that long-term strategic goals aren’t overlooked in favor of short-term adjustments.
Enhanced visibility: Rolling forecasts provide visibility into the first quarter or even further, allowing businesses to see potential outcomes and adjust strategies early.
According to FPA Trends Survey 2023, only 42% of enterprises now adopt rolling forecasts, though driver-based model implementation has declined by 10% since 2021.
Before dismissing rolling forecasts, it’s worth investigating why they might not be driving decisions. Julio and Christian argue that the root of the problem might be the complexity of your model.
Here’s why Christian suggests narrowing the focus of your rolling forecast to the parts of the business that actually move the needle:
You’ll have more time to deep dive into those key drivers.
You can look at it each month to learn what works and what doesn’t.
It’s easier to do a proper variance analysis to see what’s useful and accurate.
Simpler models are easier to finetune, optimize, and iterate on.
There’s less risk of error such as under-researched assumptions or incorrect formulas.
If it’s easier for the business to understand, they’re more likely to get behind it.
The right way to use rolling forecasts is by combining them with traditional annual planning processes and keeping your model as simple as possible. If rolling forecasts don’t make sense for your FP&A team, then the advantage is in choosing not to use them at all.
Key benefits
Provides ongoing visibility to quickly adapt to market changes and shifts in strategy.
Encourages frequent engagement with stakeholders and continual refinement of assumptions.
Offers a more dynamic planning cycle compared to rigid, once-per-year forecasting.
Potential challenges
Demands consistent time and resources to keep forecasts updated.
Can become unwieldy if too many metrics or drivers are tracked at once.
Might overshadow long-term planning if not paired with annual budgeting processes.
How to Choose the Right Forecasting Approach for Your Business
Selecting the best forecasting method depends on your company's unique circumstances.
Rather than sticking to one, many businesses benefit from a hybrid model. Consider these factors to find the right balance for your organization.
Evaluate your business stage and complexity
Early-stage startups or companies launching a new product often lack historical data, making a top-down approach more practical.
Mature businesses with established operations can leverage rich internal data for a more accurate bottom-up forecast. A complex organization with multiple business units may need a combination of methods.
Assess your data availability and quality
A bottom-up forecast is only as reliable as the data it's built on.
If your CRM and other operational systems have clean, detailed, and consistent data, this approach is highly effective. If data quality is a concern, a top-down model can provide a strategic starting point while you work on improving data infrastructure.
Align with your strategic planning purpose
Your forecasting goal should influence your choice.
For setting high-level revenue goals or securing investor confidence, a top-down forecast provides a compelling macro view. For detailed operational planning, such as headcount or demand planning, a bottom-up forecast offers the necessary granularity for effective resource allocation.
Comparing the three forecasting approaches
In summary, each forecasting method offers distinct benefits and considerations.
Bottom-up and top-down forecasting provides a balanced mix of aspirational targets and practical insights.
Driver-based forecasting links financial outcomes to specific business drivers, supporting agility and scenario planning.
Rolling forecasts offer continuous visibility for timely adjustments but require consistent commitment.
More forecasting insights…
Don’t miss out on all the insights that Christian and Julio shared during the live webinar. Watch the video for these and a great Q&A session where they dive into bottom-up vs top-down forecasting in more detail, the best further reading for driver-based forecasting, rolling forecast advice, and more.
We host new webinars all the time, featuring experienced CFOs, FP&A experts and business leaders from around the globe. Make sure you sign up to stay up to date. Subscribe for weekly updates or check out our Upcoming Events. And, if you’re looking to upgrade your forecasting process, explore how the functionality of Abacum’s forecasting software can help scaling finance teams take the next step.
Final Takeaways
When choosing your forecasting methods, remember that every organization and finance function is unique.
Bottom-up/top-down combined forecasts, driver-based forecasting, and rolling forecasts each bring valuable perspectives—whether you’re aiming to align strategic goals with operational realities, emphasize key drivers for agile decision-making, or maintain ongoing planning visibility.
Lean on real data to guide your approach, and don’t hesitate to iterate as your business evolves.
