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Monday, January 4, 2010

A Better Average


Past Performance is no guarantee of the Future


How many of you have a metric based on an average over time (i.e. Average Sales for the past 12 months)? Simple mathematical averages are a great tool to quickly compare results to an expected result, based on historical performance. Unfortunately, in their simplicity also lies a key problem: They assume results will be flat, whereas real-world results will often plot onto a curve. Often, changes are not linear either due to seasonality, or an inherent exponential factor underlying a result.


Seasonality

Few, if any, businesses do not have any seasonality. Retail sales are greatest toward the end of the year, tourist destinations have the highest bookings during their respective high season, and real estate transactions occur more frequently in the spring. Activity for these businesses, at least in part, is affected by external factors causing results to fit a curve.


Exponential factors

While not necessarily readily apparent, often activity within an organization will change in an exponential manner.

  • A simple example is interest income: Over time interest earned on an investment will exponentially increase due to compounded returns (this assumes no drawdown of the investment, as well as reinvestment of returns). Depending on the size of the investment, over a short period it can be feasible to assume a linear growth, but this will introduce greater and greater variances over time.
  • A more complex example can be seen in revenues. Often, a portion of revenues are reinvested into generating greater revenues. Conceptually, this scenario is similar to the compounded interest scenario. This differs in that it is often difficult to determine a rate of growth based on an amount reinvested in a business.


Essbase to the rescue!


Among Essbase's many built-in functions is @TREND. In layman's terms, @TREND calculated a weighted average of a series of values. Options allow for fourdifferent weighting algorithms:
  • Linear Regression - Standard linear regression (similar to a typical average), with an option to assign priority to points to adjust the importance of certain events.
  • Single Exponential Smoothing - Weighting system giving more importance to earlier values than later values. Allows for an adjustment to how much more weight is applied to earlier values.
  • Double Exponential Smoothing - Similar to Single Exponential Smoothing, but includes an additional adjustment to influence the resulting slope, or curve, of the result.
  • Triple Exponential Smoothing - Builds on Double Exponential Smoothing with a third influence factor. This algorithm is particularly useful for seasonal values.


Some points to consider:

  • #MISSING values: some algorithms remove #MISSINGs from the list of values (i.e. they are not treated as zeros), other algorithms do not allow any values to be #MISSING.
  • Usage: The function may only be used in a calculation script; it may not be placed within a member formula. Inside of a calculation script the function must be associated with a member.
  • The order of members passed to the function will influence the result, since weights are applied differently depending on where in the list a value appears. Consider carefully the order of members in the outline, whether that order will change, and what impact that will have. It may be useful to utilize the @LIST function to hardcode a specific order.

For more information on @TREND, see the "Trend Calculation Function" in the Essbase Technical Reference (this is available via the Oracle website if it is not installed on your system).

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