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Forecasting Tips

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Primary Developer: Liam Bastick

General Cover Notes:
This workbook provides basic examples of forecasting using linear regression analysis.
Any queries, please e-mail:
Website:
For past articles visit:

liam.bastick@corality.com
www.corality.com
www.sumproduct.com

Table of Contents
Forecasting Tips
Go to Cover Sheet

Section & Sheet Titles

1. Examples
a.
b.
c.
d.
e.

TREND Illustration
Linear Regression
LINEST Example
LINEST More Complex
Bias and Accuracy

Total Pages:

Page
3
4
6
9
11
14

14

Examples
Section 1.
Forecasting Tips
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Section Cover Notes:

Various examples for forecasting.

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Page 3 of 18

TREND Illustration
Forecasting Tips
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Simple Example
Period

Sales ($)

133,890

135,000

135,790

137,300

138,130

139,100

139,900

141,120

141,890

10

143,230

11

144,000

12
13
14
15
16
17
18
19
20
21
22
23
24

145,290
146,172
147,190
148,208
149,226
150,244
151,262
152,281
153,299
154,317
155,335
156,353
157,372

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TREND Illustration
Forecasting Tips
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Simple Example
Problem with Seasonality
Period

Sales ($)

133,890

8.00%

135,000

8.06%

135,790

8.11%

137,300

8.20%

138,130

8.25%

139,100

8.31%

139,900

8.35%

141,120

8.43%

141,890

8.47%

10

143,230

8.55%

11

144,000

8.60%

12

145,290

8.68%

13

145,612

8.00%

14

146,820

8.06%

15

147,679

8.11%

16

149,321

8.20%

17

150,224

8.25%

18

151,278

8.31%

19

152,149

8.35%

20

153,475

8.43%

21

154,313

8.47%

22

155,770

8.55%

23

156,607

8.60%

24

158,010

8.68%

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Growth

8.76%

Page 5 of 18

Linear Regression
Forecasting Tips
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Scenario
Company ABC Limited is interested in finding out the relationship between the amount that is spent on marketing
and the level of sales. The marketing manager believes that, as marketing expenditure increases,
the sales levels increase accordingly.

Task
Your task, as an accountant, is to analyse past data to determine whether there is in fact a relationship
between Marketing Expenditure and Sales levels.

Step 1. Collect the Data

The Marketing manager has provided you with some data showing monthly marketing expenditure and sales data for previous periods.

Marketing
Expenditure Sales
($ '000)
($ '000)

Month
Jul-08

300

530

Aug-08

346

635

Sep-08

834

1,000

Oct-08

723

938

Nov-08

130

274

Dec-08

624

793

Jan-09

345

536

Feb-09

768

1,450

Mar-09

464

800

Apr-09

624

826

May-09

270

373

Jun-09

389

403

Jul-09

917

1,592

Aug-09

836

1,632

Sep-09

613

804

Oct-09

741

1,064

Nov-09

456

582

Dec-09

246

425

Jan-10

734

903

Feb-10

824

946

Mar-10

234

306

Apr-10

423

623

May-10

682

835

Jun-10

234

352

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1,800

Marketing Expenditure ($ '000)

1,600

Sales ($ '000)

1,400

1,200

1,000

800

600

400

200

Jul-08 Aug- Sep08

08

Oct08

Nov- Dec08
08

Jan09

Feb- Mar09
09

Apr- May09
09

Jun- Jul-09 Aug- Sep09

09
09

Oct09

Page 6 of 18

Nov- Dec09
09

Jan10

Feb- Mar10
10

Apr10

May10

Jun10

Linear Regression
Forecasting Tips
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Scenario
Note: In all the calculations below, Marketing Expenditure is referred to as [x_values]
whilst the Sales data is referred to as [y_values].

Step 2. Perform calculations to determine the line of best fit

General Form
A straight line i y = mx + b
where m is the gradient, and b is the y-intercept.
m and b essentially determine what the line is, and we'll be calculating both of them.
Calculating the y-intercept (b)
This tells us where the curve hits the y-axis.
known_y's
Sales_Data
known_x's
Marketing_Data
INTERCEPT Formula

8.55 INTERCEPT(known_y's,known_x's)

What does this intercept tell us? It tells us that if our marketing expenditure was $0, we would still be making $8.55 worth of sales.
Calculating the gradient or slope (m)
This tells us how steep the line is.
known_y's
Sales_Data
known_x's
Marketing_Data
const
omitted
stats
omitted
SLOPE Formula

1.44 LINEST(known_y's, [known_x's], [const], [stats])

Using LINEST

1.44

8.55

What does the gradient tell us? It means that for every additional $1 spent on Marketing, the company is getting an additional $1.44 worth of sales.
Put in another way, we can say that the company sales levels are 1.44x the costs of marketing.
Now we have found out the equation of our line, it is:
y = 1.44x + 8.55
where

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y is the Sales level

x is the Marketing Expenditure

Page 7 of 18

Linear Regression
Forecasting Tips
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Scenario
Step 3. Create a Graph
To make it easier to visualise this relationship, let's create a graph.
To do this, highlight the [Marketing Expenditure] and [Sales] columns,
then insert and a new chart.
Right click on the chart, select "Add Trendline", and select the "Linear" option.

Relationship between Marketing Expenditure and Sales levels

Sales ($ '000)

1,800
1,600
1,400

f(x) = 1.44x + 8.55

R = 0.81

1,200
1,000
800
600
400
200
-

100

200

300

400

500

600

700

800

900

1,000

Marketing Expenditure ($ '000)

Step 4. Forecast any value

Marketing Expenditure Level
Predicted Sales

800
1163.48
1163.48

LOGEST (Growth constant)

Predicted Sales level

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1.002
1175.51

<< User inputs any value for Marketing

<< This is the predicted value according to FORECAST
<< This is the predicted value according to TREND
241.089 << This is the predicted value according to LOGEST
<< This is the predicted Sales value according to GROWTH

Page 8 of 18

LINEST Example
Forecasting Tips
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Commentary
Your client has been to contribute to an awareness campaign to help reduce traffic accidents. To help target the campaign you want to understand how groups of
drivers vary. One strong hypothesis is that old drivers are slow and erratic and young drivers are fast. To investigate this you send out the analysts, who gather the
following data on speed and age.

Data

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50

Average
Speed
(km / hr)

46.1
38.4
60.4
27.6
40.8
35.9
56.5
76.1
48.9
52.4
73.1
44.7
27.4
65.2
59.1
48.2
33.8
18.9
64.7
23.0
44.8
59.1
33.6
74.7
40.9
64.6
75.8
48.8
55.0
29.7
35.9
57.6
28.0
35.6
70.1
77.0
40.5
19.1
29.0
31.1
52.9
36.8
65.2
35.1
46.7
19.7
30.9
51.9
73.3
59.4

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95.2
103.7
97.7
100.4
98.5
105.2
102.1
96.0
97.8
95.0
101.4
97.2
100.9
102.8
93.2
96.0
101.1
99.4
92.0
99.8
103.0
100.1
101.3
96.1
96.5
99.4
87.7
92.8
94.3
100.5
105.3
106.0
102.2
103.4
92.0
89.0
101.7
101.8
101.3
98.3
93.7
103.3
100.3
104.5
103.4
101.5
103.8
102.0
102.8
100.6

Speed vs. Age

110.0

105.0
f(x) = - 0.12x + 105.09
R = 0.23

100.0

Average Speed (km/h)

Observ
ation Driver Age
No.
(yrs)

95.0

90.0

85.0

80.0
10.0

20.0

30.0

40.0

50.0
Age

60.0

70.0

80.0

90.0

Page 9 of 18

LINEST Example
Forecasting Tips
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Commentary
Your client has been to contribute to an awareness campaign to help reduce traffic accidents. To help target the campaign you want to understand how groups of

driversSimple
vary. One
strongEquation
hypothesis(with
is thatone
old drivers
are slow and
erratic and young drivers are fast. To investigate this you send out the analysts, who gather the
Very
Linear
independent
variable)
following data on speed and age.

y= c+ x

where:
y = Dependent Variable
c = Intercept / Constant
= Slope / Co-efficient
x = Independent Variable

Calculation
c = Intercept / Constant
= Slope / Co-efficient
Relationship

Relevant Function

105.09

c = Intercept / Constant

(0.12)

= Slope / Co-efficient

Average Speed (km / hr) = 105.09 - 0.12 x Driver Age (yrs)

Relationship

=LINEST(known_y's,[known_x's],[const],[stats])

Relevant Function

[const] = logical argument that dictates whether or not to include a constant (1 = YES or 0 =
NO).
Default is YES
[stats] = logical argument that dictates whether or not to include additional statistics (1 = YES
or 0 = NO).
Default is NO

Where:

Where:
##
##

For now, we will leave them both at their default settings.

Calculation
Output from LINEST
Relationship

(0.12)

105.09

Output from LINEST

Average Speed (km / hr) = 105.09 - 0.12 x Driver Age (yrs)

Relationship

Caution:
This relationship cannot be generalised to represent populations aged less than 20, or more than 80 years old!

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LINEST More Complex

Forecasting Tips
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Commentary
You decide to drill down further on your traffic data, and create a more sophisticated analysis.
Now, you decide to perform the same estimation, but across a whole range of variables including:
- Age;
- Vehicle Value;
- Driver Gender; and
- Number of Passengers.

Note
We now embark upon a multi-factor linear estimation. That is, an estimation of a relationship between multiple independent variables, and a single dependent variable.
Some important points to consider when using LINEST (or Ordinary Least Squares) are that it assumes:
- All of the variables are independent from one another; and
- All of the observations are independent from one another.
If these assumptions are not true, then the output from the regression may be flawed.

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LINEST More Complex

Forecasting Tips
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Commentary
Data set
Observation
No.

Number of
Passengers

Vehicle
Value
($'000)

Driver Age
(yrs)

Driver is
Male (1) or
Female (0)

Average
Speed
(km / hr)

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45

4
3
1
1
4
5
2
6
5
3
4
3
4
5
4
2
6
4
4
5
3
5
4
4
6
5
1
4
1
3
5
5
5
2
4
4
3
4
5
3
2
2
3
4
2

$16.5
$21.3
$13.9
$42.2
$22.2
$35.1
$16.1
$24.0
$42.2
$14.2
$16.0
$6.2
$43.1
$43.1
$29.9
$0.6
$26.4
$2.7
$41.0
$11.9
$32.4
$30.5
$32.4
$8.2
$13.2
$45.9
$33.9
$26.9
$29.4
$41.8
$35.7
$48.1
$39.2
$13.4
$2.3
$40.6
$45.4
$4.2
$10.9
$5.5
$44.6
$2.5
$20.8
$12.4
$17.2

46.1
38.4
60.4
27.6
40.8
35.9
56.5
76.1
48.9
52.4
73.1
44.7
27.4
65.2
59.1
48.2
33.8
18.9
64.7
23.0
44.8
59.1
33.6
74.7
40.9
64.6
75.8
48.8
55.0
29.7
35.9
57.6
28.0
35.6
70.1
77.0
40.5
19.1
29.0
31.1
52.9
36.8
65.2
35.1
46.7

0
1
0
0
0
1
1
0
1
0
0
0
0
0
0
0
1
0
0
0
1
0
0
0
0
0
0
0
0
0
1
1
0
1
0
0
1
0
0
0
0
1
0
1
1

95.2
103.7
97.7
100.4
98.5
105.2
102.1
96.0
97.8
95.0
101.4
97.2
100.9
102.8
93.2
96.0
101.1
99.4
92.0
99.8
103.0
100.1
101.3
96.1
96.5
99.4
87.7
92.8
94.3
100.5
105.3
106.0
102.2
103.4
92.0
89.0
101.7
101.8
101.3
98.3
93.7
103.3
100.3
104.5
103.4

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LINEST More Complex

Forecasting Tips
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Commentary
46
47
48
49
50

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5
5
4
5
4

$28.1
$10.2
$35.2
$43.0
$31.2

19.7
30.9
51.9
73.3
59.4

0
1
0
1
0

101.5
103.8
102.0
102.8
100.6

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LINEST More Complex

Forecasting Tips
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Commentary
Estimated Vehicle Speeds
Vehicle
Vehicle A
Vehicle B
Vehicle C

Number of
Passengers

Vehicle
Value
($'000)

Driver Age
(yrs)

Driver is
Male (1) or
Female (0)

3
1
5

$15.0
$20.0
$10.0

20.0
60.0
35.0

1
0
1

Multi-factor Linear Regression Equation

y=c+ 1 x 1 + 2 x 2 + 3 x3 + 4 x 4
Use LINEST (at default settings) to calculate co-efficients
4
4.86

Output from LINEST

3
(0.10)

2
0.02

1
0.54

N
u
m
4b
e
Output from LINEST
r

c
100.25

o
f

Comments:
We can now estimate the average speed of a vehicle using the coefficients calculated.

Estimated Vehicle Speeds - Outputs

Co-efficient

Vehicle
Vehicle A
Vehicle B
Vehicle C

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Number of
Passengers

Vehicle
Value
($'000)

Driver Age
(yrs)

Driver is
Male (1) or
Female (0)

Estimated Average
Speed
(km / hr)

3
1
5

$15.0
$20.0
$10.0

20.0
60.0
35.0

1
0
1

104.92
94.96
104.37

Page 14 of 18

P
a
s
s
e
n
g
e
###
r
s
Vehicle
Vehicle A
Vehicle B
Vehicle C

Bias and Accuracy

Forecasting Tips
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There are two aspects of forecasting errors to be concerned about - Bias and Accuracy
Bias - A forecast is biased if it errs more in one direction than in the other
- whether the method tends to under-forecast or over-forecast.
Accuracy - Forecast accuracy refers to the distance of the forecasts from actual demand, ignoring the direction of that error.

Example
For six periods forecasts and actual demand have been tracked. The following table gives actual demand D t and forecast demand Ft for six periods:
t

Dt

Ft

Et

(Et)2

|Et|

|Et|/Dt

170

200

230

195

-30

900

30

17.65%

35

1225

35

250

15.22%

210

40

1600

40

16.00%

4
5

200

220

-20

400

20

10.00%

185

210

-25

625

25

13.51%

180

200

-20

400

20

11.11%

-20

5150

170

83.49%

Total
Forecast Measure

1. Cumulative sum of Forecast Errors (CFE) = -20

2. Mean Absolute Deviation (MAD) = 170 / 6 = 28.33
3. Mean Squared Error (MSE) = 5,150 / 6 = 858.33
4. Standard Deviation (SD) = SQRT(5,150 / 6) = 29.30
5. Mean Absolute Percentage Error (MAPE) = 83.49% / 6 = 13.91%

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Bias and Accuracy

Forecasting Tips
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There are two aspects of forecasting errors to be concerned about - Bias and Accuracy

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