A Forecast Model Does Not A Forecast Make

I hear a lot of people talk about "the forecast" while referencing a spreadsheet with anywhere from a few to thousands of calculations in it...a model. Indeed, I have made a nice living building and using forecast models every day. But none of those models were forecasts. They were tools I built and used in the process of forecasting.

According to Merriam-Webster, the word forecast is a transitive verb to forecast. It is something we do, and a forecast model gives us an efficient way to do it. A model is the articulation of a thought process, fueled by analysis. It is the description of relationships we believe exist between assumptions formed from information available today and things we believe could be possible in the future.

Each new day we get more information against which to evaluate the assumptions we made yesterday. If today reveals something different from what we predicted yesterday, logic would dictate that we update our assumptions...inputs to the model. Sometimes even the structure of the model needs to evolve. Too often, they don't. Because the model has been mistaken for the forecast. The forecast process has broken. Any valuation analysis informed by a broken forecast process may lead to under or over investment, both of which lead to lost opportunity.

I've always taken pride in my team's ability to build and evolve forecast and valuation models that are highly representative of the markets we are evaluating. They enable deep insights with the capability to rigorously challenge what we assume about things that haven't happened yet. We can even test what the world would look like if we are wrong on key assumptions. They have informed decisions involving hundreds of millions of dollars of investment.

When referencing mathematical models (financial or otherwise) we have all heard "the map is not the territory". Neither is the forecast model the forecast (but you'd be hard pressed to forecast without one)!

Michael Kubica is founder and President of MedTech Valuation, Inc. For more information visit www.MedTechValuation.com or contact Michael directly at mkubica@MedTechValuation.com.

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How to create a credible and defensible strategic forecast


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