Make Forecasts - How extensive is it?

[Jugglertwo]

I figured that I would check with the various Excel gurus to see what I have
to deal with related to this topic. Here goes:

1) My boss has asked me to help him forecast different expenses for next
year based on the last four years.
2) I'm very familar with Excel's various versions (2000-2007) and can do
most things. We use 2003 and 2007. However, I have never deal with Excel's
forecasting feature and capabilities. I just spent 20 minutes reading about
it and another hour trying out an example in one of my Excel books. It seems
VERY complicated.
3) Here are my questions: a) How much is there to forecasting? How much time
would one need to spend to get a grasp of the basics before trying to explain
this to someone? b) Does forecasting really require an extensive
understanding of finances and terminology?
4) I don't know if I'm going to end up "over my head" as I start to address
this request.
Any suggestions/advice would be greatly appreciated !
Thanks!
Juggletwo

 

[joeu2004]

3) Here are my questions: a) How much is there to forecasting?

The answer depends on your definition of a "correct" (reasonable)
forecast. Are you familiar with the term GIGO ("garbage in, garbage
out")?

Forecasting can be as simple as using the FORECAST() function in
Excel. (See the Help text.) But often that leads to an
"incorrect" (inaccurate) forecaste, simply because a linear
extrapolation of the past does not correctly forecast the future in
many situations.

How much time would one need to spend to get a grasp of the
basics before trying to explain this to someone?

A little or a lot, depending on the sophistication of the explanation
required.

I think you mean: how much prestudy would you need before you could
understand someone's explanation?

Unfortunately, the answer is the same: a little or a lot, depending
the sophistication of the explanation and the skill of the teacher.
The right person would tailor the explanation to you; and in many
cases, the explanation can be made relatively simple.

At a minimum, I would say that it would be ideal if you have a basic
understanding of statistics. The degree of knowledge required depends
on the complexity of the forecasting model and the tools that you
choose to use.

Does forecasting really require an extensive understanding
of finances and terminology?

Generally, you need some understanding of the thing that you are
forecasting. For example, if you are forecasting product demand, you
should first understand what that demand depends on. Is it
seasonable? How is it related, or not, to the state of economy or
other external circumstances?

But as a start, you might try simply charting past data and see what
trends you can intuit from it. This can be a dangerous approach; but
it is probably the most common approach. For example, if you observe
a linear trend, use the FORECAST() function or linear trendline.

HTH.


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[Jugglertwo]

thanks so much for your thorough response. This was exactly what I was
looking for and I find it very helpful as I move forward with this at work.
thanks again!
Jugglertwo