Forecasting technology: the state of the market: governments can choose from a number of software packages to use in forecasting, and choosing the right one for any given jurisdiction involves a number of factors.

• Author: Fu, Elizabeth
• Position: Solutions

Technology has been a boon to many of the essential functions of the government finance officer --accounting, payroll, accounts payable, and more. However, some functions have not benefited from technology to quite the same degree, and one notable instance is forecasting. The challenge is that forecasting is an art as well as a science, not a highly structured, routine process in the way that processing a paycheck or making a journal entry is. This means that it is difficult to develop a mass-market technology solution for forecasting.

Nevertheless, software solutions are available, but they vary widely. This article provides an overview of the capabilities of three general categories of software solutions traditionally employed by local governments and of dedicated forecasting software used by several vanguard local governments:.

* Excel and Excel add-ins for forecasting.

* Statistical software packages.

* Dedicated forecasting applications.

Note that these categories do not represent a comprehensive catalog of potential forecasting solutions--they focus on "pure play" solutions intended specifically for forecasting. Excluded from these categories are solutions such as budgeting software and business intelligence systems, which often provide forecasting capabilities, but within a much broader array of functionality. Hence, significantly greater time and money would be required to implement them than the solutions considered here. The solutions described in this article serve as illustrative examples for their respective categories, and the use of these examples does not imply a GFOA endorsement. (1)

EXCEL AND EXCEL ADD-INS

Excel, despite its accessibility, has critics who challenge its role in forecasting because of the software's limitations. Users typically go about forecasting in Excel by reviewing the data to identify and evaluating appropriate forecasting methods. And this is one limitation--sometimes the dataset isn't telling and statistical analysis is needed to help determine an appropriate forecasting method. Statistical analysis in Excel can involve manually entering functions. However, the Excel Analysis ToolPak, an add-in that comes standard with the software, can be used to make better use of Excel's analytical potential. Activating the add-in provides users with 19 analysis tools, accessible via a Data Analysis icon under the Data tab (see Exhibit 1.)

Another tool forecasters commonly use in Excel is graphs. Users will graph a time series dataset and then add a trendline, which is a curve that attempts to "fit" a given dataset to forecast future values. The disadvantage is that Excel offers just six types of trendlines (although more advanced users can manually compute more complex regression analysis in Excel), and users have to exercise their own judgment as to which one should be used based on the data.

Dedicated Excel models are another option. The City of Atlanta...