Only a bottom-up approach gives you real control over your forecasts

The easiest way to make a budget is to take last year's monthly revenues and apply a multiplier to reflect your growth ambitions for the year. Apply some costs to arrive at a profit figure, and maybe some allocations to split sales down to customer segment / order channel / product category, and there you have your budget. In a predictable and steady-state business environment, this sort of top-down planning approach can work quite well. It is quick and easy, works reasonably well in a spreadsheet and comes up with a result that is probably not going to be too far out.

However, this implicitly assumes that everything will be much like it was last year - it makes no attempt to model the actual workings of the business. Throw in a major disruption like a recession, or a global pandemic, and the weaknesses of this approach become all too apparent. Whilst the top-down budget may have defined a series of monthly targets, the reality may be very different. Nevertheless, it is still important to try to create as accurate a sales forecast as possible, to allow the business to operate efficiently. But because, in the top-down approach, the revenues are just taken as a 'given', with no understanding of what is driving them, it offers planners precious few levers with which to make adjustments.

In reality, those revenues are not a starting point, but the end result of a complex series of interactions. In some businesses, a bottom-up forecast might take customer segments as a starting point - for others, the planned marketing activities or promotions might be a better basis. Either way, a bottom-up approach gives you many more levers with which to steer the forecast, which is vital when patterns change radically. Drivers like:

  • How often customers buy
  • How much they spend
  • What products they choose
  • What purchasing channels they prefer
  • How they respond to promotional activities

can all change significantly at times of stress. These differences can add up to a radically different outlook for the business, which it needs to know if it is to survive. A good bottom-up forecast will allow a business to vary each of these drivers independently, and to carry out what-if analyses to explore various different scenarios. This is often known as driver-based planning or driver-based budgeting, and unlike the top-down approach, it models the actual way the business operates and gives the planners the levers that really matter.

You need the right tool for the job

Bottom-up planning does not have to start from the lowest level of detail - it really depends on the nature of the business.  Also, it can happily co-exist with a top-down approach as a way to build overall targets. However, it is more computationally intensive than the top-down approach - that is why it is more powerful and gives better data. Businesses need a good tool to support them in this, and that is exactly what Compas is for. Tailored to the precise needs of each business, it allows planners - whether from Marketing, Finance or a specialised planning department - to enter and adjust those factors that really drive their business. Compas then takes on the task of turning those inputs into valuable and consistent forecasts. It also keeps track of previous forecasts, allowing the users to see exactly what has changed from week to week.

Because Compas is tailored to reflect the underlying business model, each factor can be entered at the level of detail that makes most sense. For example, it might make sense to specify an assumed product mix across all customers, whereas different customer segments might need a different average order frequency and spend. Everything is entered at the level of detail that strikes the best balance between simplicity and accuracy, and Compas does all the hard work of crunching the numbers and generating the forecasts needed by all departments. As it also integrates with internal and external systems, assumptions can be automatically updated based on recent sales, if desired, enabling the system to respond dynamically to changes in behaviour as they are observed.

Top-down planning can work well as a starting point, but to build a really responsive forecast, you need to base it on the actual drivers of the business.

For more information about driver-based planning, and to discuss a free proof of concept for your business, please contact us