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Stanford University Professor’s tips on cash flow forecasting

Paul Saffo is a technology forecaster based in Silicon Valley who is a Consulting Professor in the School of Engineering at Stanford University. In his Harvard Business Review paper published in 2007 he wrote, “The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.” 

His six rules for effective forecasting are:

  1. Define a cone of uncertainty: You have to rely on your intuition and judgement, so you need to define what is inside and outside the forecast
  2. Look for the S curve: Change rarely unfolds in a straight line. The most important developments typically follow the S-curve shape of a power law: Change starts slowly and incrementally, putters along quietly, and then suddenly explodes, eventually tapering off and even dropping back down.
  3. Embrace the things that don’t fit: The best way for forecasters to spot an emerging S curve is to become attuned to things that don’t fit, things people can’t classify or will even reject. 
  4. Hold Strong Opinions Weakly: One of the biggest mistakes a forecaster—or a decision maker—can make is to over rely on one piece of seemingly strong information because it happens to reinforce the conclusion he or she has already reached. 
  5. Look Back Twice as Far as You Look Forward: So when you look back for parallels, always look back at least twice as far as you are looking forward. Search for similar patterns, keeping in mind that history—especially recent history—rarely repeats itself directly. And don’t be afraid to keep looking further back if the double interval is not enough to trigger your forecaster’s informed intuition.
  6. Know When Not to Make a Forecast: It is important to note that there are moments when forecasting is comparatively easy—and other moments when it is impossible.

(See www.hbrreprints.org, reprint R0707K)

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