Creating certainty within the uncertain
Forecasting techniques for an evolving world
David Peters, CPA | February/March 2026 Footnote
Editor's note: Updated January 29, 2026
Forecasting has become increasingly difficult in recent years due to inflation, technology changes and regulatory changes. For this reason, many organizations no longer have a one-point forecast and may instead look at a range of outcomes.
Certain techniques, like scenario planning, forecasting using common size financial statements and horizontal analysis, have become increasingly common. By incorporating these techniques where they are appropriate, we can make our forecasts a more viable and adaptable tool.
Scenario planning: It is all about what you can dream up
Scenario planning is a variation of flexible forecasting. Essentially, companies look at how the relationship between key forecast variables will change if certain significant events happen. For example, imagine a company wants to analyze how its forecast changes if their biggest competitor lowered their prices. In this instance, they may reason that they would be forced to counter with a price drop of their own. If they did lower prices, they may believe that gross margin would go down — but the overall impact might be small, because the volume of sales would potentially increase.
It should be noted that forecasting using scenario planning should not just focus on negative events, but positive ones as well. For example, a drop in mortgage interest rates may result in greater home purchases for a real estate brokerage firm or a milder winter may result in less claims cost for an auto insurance company. The point of incorporating scenarios into the forecasting process is twofold. First, it allows us to analyze how our key variables relate to one another. Second, it allows us to think through real possibilities of things that could happen to our company, rather than simply assuming things will stay the same.
However, scenario planning does not incorporate everything that could happen. As my grandmother used to say to me, “You can only think of the stuff you can think of.” As we saw, few companies incorporated a global pandemic into their forecasting for 2020; however, if you can plan for some of the more realistic scenarios in your forecast, you can see how wide a range of possibilities your company may face in the future. You can also figure out how your company should react and where adjustments need to be made if certain events become a reality.
Common size financial statements: Aspirational forecasting
In certain instances, a company may not want to only project the results they think they will hit. Instead, they may like to aim for a more specific goal. For example, a startup company may have a goal of breaking even within three years or a more established company may have a goal of becoming the best firm in a particular industry. This approach may involve closely examining where they can be more efficient than the current market leader. In these situations, the forecast may be based on an aspirational goal — rather than current company performance.
Forecasting using common size financial statements involves taking the financial statements of another company (usually the market leader) and turning each of their line items into a percentage of gross revenue. You then take these same percentages (perhaps with some adjustments) and apply them to your own forecast line items. In this way, you are seeing what targets you need to hit to meet your aspirational goal.
Step 1: Turn the target company’s financial statements into percentages.
| |
Most recent year of target company |
% of revenue |
| Revenue |
$48,000,019 |
100% |
| Cost of sales |
$25,265,318 |
52.64% |
| Gross margin |
$22,734,701 |
47.36% |
| Research & development |
$2,524,018 |
5.26% |
| Marketing |
$8,060,242 |
10.44% |
| General & admin |
$523,612 |
1.09% |
| Oeprating expenses |
$8,060,242 |
16.7% |
| Net income |
$14,674,459 |
30.57% |
Step 2: Apply the same percentages to our forecast (let’s assume we are projecting revenue of $10 million).
| |
Forecast for your company |
% of revenue |
| Revenue |
$10,000,000 |
100% |
| Cost of sales |
$5,263,606 |
52.64% |
| Gross margin |
$4,736,394 |
47.36% |
| Research & development |
$525,837 |
5.26% |
| Marketing |
$1,044,294 |
10.44% |
| General & admin |
$109,086 |
1.09% |
| Operating expenses |
$1,679,216 |
16.79% |
| Net income |
$3,057,178 |
30.57% |
For instance, we would multiply the 5.26% for the research and development expense from our target company together with our own projected revenue forecast of $10 million to calculate our aspirational research and development cost of $525,837. If we want to be more efficient than the target company, we might use 4% for this line item or even lower. By turning everything into a percentage, you create a forecast that is scaled to your business as it currently is. This approach may help you create the top range for your forecast, aiming to be as efficient as the market leader.
The biggest shortcoming with forecasting based on common size financial statements is often the availability of data. If you are going to benchmark against a market leader (or even against industry variables), you need to be able to access the information first. This may be problematic if the industry leader is a privately held company. However, when the information is available, common size forecasting gives the company something to shoot for and can help you see progress over time.
Horizontal analysis: Keeping our projections reasonable
The most common problem when using a range of outcomes in forecasting is checking for reasonableness. In other words, how do we make sure we are not being too optimistic in our high-range forecast or too pessimistic in our low-range forecast? Horizontal analysis is one method of dealing with this issue. For each line item, we look at the percentage change over a historical period.
For instance, let’s say our previous sales changed by the following actual percentages each month (see Example 1).
Example 1
| |
Year 3 |
Year 2 |
Year 1 |
| Jan. |
2.3% |
1.8% |
4.1% |
| Feb. |
1.4% |
1.0% |
0.8% |
| March |
0.1% |
-0.2% |
-0.1% |
| April |
-1.2% |
-0.7% |
-0.5% |
| May |
1.2% |
1.3% |
2.9% |
| June |
5.1% |
1.1% |
0.4% |
| July |
0.1% |
0.1% |
0.2% |
| Aug. |
0.2% |
0.3% |
6.0% |
| Sept. |
0.1% |
2.1% |
3.0% |
| Oct. |
0.0% |
0.1% |
0.1% |
| Nov. |
-0.8% |
-0.1% |
-0.4% |
| Dec. |
-0.2% |
-1.5% |
-0.9% |
When putting together our forecast, we should keep in mind that sales increased by 6% from one month to the next only once in three years. We should also note that sales have typically slowed at the end of the year. By using actual numbers, we can adjust our forecast to something reasonable within these parameters.
However, it is important to keep in mind that these bounds are limited to recent history. This technique may not be appropriate if we expect the next few years to be different from the previous ones. For example, significant regulatory changes or changes in economic outlooks may cause a projection that differs from what previous data has shown.
The importance of staying flexible
The theme that runs through all these techniques is flexibility. If we want more accurate forecasts, we have to incorporate uncertainty into them within the boundaries of what we think is reasonable and possible. There is no way to think of everything. But if we look at a range of possibilities, we can get a better understanding of how certain events and key variables affect our companies and, ultimately, our results.
David Peters is the founder and owner of Peters Tax Preparation & Consulting PC, a financial adviser for Peters Financial LLC in Richmond, Virginia, and national speaker on tax and business and industry topics. He has more than 22 years of experience in financial services, including three years in the hedge fund industry and 11 years in insurance. You may reach him at david@davidpetersfinancial.com.
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