Five ways to turn nine months of actuals into a full year, and the fourth quarter each of them quietly promises.
To forecast the full year from year-to-date actuals, add the actuals to the budget for the remaining months, scaled by how far actuals have run against budget so far. After nine months at 69.0 million against a budget of 71.0, the year-to-date ratio is 97.18 per cent, and the full-year forecast is 69.0 + 29.0 × 0.9718 = 97.18 million, 2.82 per cent below a 100.0 million budget. The simple run-rate, 69.0 divided by nine and multiplied by twelve, gives 92.00 million: 5.18 million too low, because it ignores that the last quarter is the biggest.
Worked in full in Financial Planning and Analysis by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every method below is arithmetically correct. They differ in what they assume about the months that have not happened yet, and in a seasonal business those assumptions are worth more than the actuals themselves.
| Quarter | Budget | Actual | Prior year |
|---|---|---|---|
| Q1 | 22.0 | 21.0 | 20.5 |
| Q2 | 24.0 | 23.4 | 22.8 |
| Q3 | 25.0 | 24.6 | 23.9 |
| Q4 | 29.0 | 28.3 | |
| Year to date (Q1 to Q3) | 71.0 | 69.0 | 67.2 |
| Full year | 100.0 | 95.5 |
Step 1: the year-to-date performance ratio.
YTD ratio = actual YTD / budget YTD = 69.0 / 71.0 = 0.9718
Step 2: apply it to what remains. The budget already carries the seasonality: it expects 29.0 of the year's 100.0, 29 per cent, in the fourth quarter. Scale that remaining budget by the ratio and add the actuals.
Full-year forecast = actual YTD + remaining budget × YTD ratio = 69.0 + 29.0 × 0.9718 = 69.0 + 28.18 = 97.18
Excel, with months in columns and a month counter: =SUM(Actual_YTD)+SUM(Budget_Remaining)*SUM(Actual_YTD)/SUM(Budget_YTD). The same answer comes from dividing the actuals by the budget's year-to-date share: 69.0 / 71% = 97.18.
| Method | Q4 implied | Full year | vs budget |
|---|---|---|---|
| Run-rate: YTD × 12/9 | 23.00 | 92.00 | −8.00% |
| YTD + remaining budget unchanged | 29.00 | 98.00 | −2.00% |
| YTD + remaining budget × YTD ratio (97.18%) | 28.18 | 97.18 | −2.82% |
| YTD + remaining budget × Q3 ratio (98.4%) | 28.54 | 97.54 | −2.46% |
| Prior-year seasonality: YTD / 70.37% | 29.06 | 98.06 | −1.94% |
Read the "Q4 implied" column, not the full-year one: it is what each method is quietly promising. The run-rate promises a fourth quarter of 23.00, below every quarter this year, in the quarter that is normally the largest. "Remaining budget unchanged" promises that a business 2.82 per cent behind for nine months will hit its fourth-quarter budget exactly. The ratio methods assume the shortfall persists; the Q3 ratio gives weight to an improving trend (Q1 was 95.5 per cent of budget, Q3 98.4 per cent). The prior-year shape is useful as a cross-check when the budget's phasing was itself a guess.
The choice between the ratio on the whole year to date and the ratio on the latest quarter is a judgement about whether the improvement is real. State it on the page: "Q4 at 97.18 per cent of budget, the year-to-date run", or "at 98.4 per cent, the third quarter's run".
| Q4 share of the year | YTD actual | Run-rate forecast | Ratio forecast | Run-rate error |
|---|---|---|---|---|
| 25% (flat year) | 72.89 | 97.18 | 97.18 | 0.00 |
| 29% | 69.00 | 92.00 | 97.18 | −5.18 |
| 33% | 65.11 | 86.82 | 97.18 | −10.37 |
The run-rate is only right when the year is flat. Each four points of seasonality in the last quarter moves it about five million on a 100 million business. In a business whose quarters are heavily back-ended, such as a retailer, an annual software renewer or a contractor, the run-rate is not a forecast at all.
Once the forecast is set, the variance to budget should be split into volume and efficiency before anyone explains it: how to calculate a flexible budget variance shows how.
Actuals to date plus the remaining budget, scaled by the year-to-date performance ratio: 97.18 million here, against 92.00 from the run-rate. Show the fourth quarter each method implies, and state which ratio you used and why. The free workbook for this book carries a full reforecast with the forecast error log beside it.
Year-end forecast equals actual year to date plus the remaining budget times actual year to date over budget year to date. With 69.0 million of actuals, a 71.0 million year-to-date budget and 29.0 million left in the budget, that is 69.0 plus 28.18, or 97.18 million. It equals the actuals divided by the budget's year-to-date share, 71 per cent.
Because it assumes every month is the same size. In a business whose fourth quarter is 29 per cent of the year, nine months of 69.0 million annualise to 92.00 million, implying a fourth quarter of 23.00, the weakest of the year. The seasonal method gives 97.18. At a 33 per cent fourth quarter the run-rate error would be 10.37 million.
Use the year to date unless there is evidence the trend has changed, and say which you chose. Here the year to date runs at 97.18 per cent of budget and the third quarter at 98.4 per cent; the two give 97.18 and 97.54 million. The 0.36 million between them is a judgement about whether the improvement is real.
The reforecast is worked in chapter 10 of Financial Planning and Analysis. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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