The concept of Financial Forecasting
Financial forecasting is a process of projecting future financial requirements of a firm. A financial forecast is an estimate of future financial outcomes for a company. The financial manager is concerned with the futurity of financial performance.
Financial forecasting, an integral part of finance manager’s job, is an act of deciding in advance the quantum of funds requirements of the firm and the time pattern of such requirements. It estimates future income and expenses for a business over a period of time, generally the next year. In the process of financial forecasting, financial manager is supposed to develop projected financial statements. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent.
Efficient financial forecasting enables a financial manager to plan for future financing requirements and to identify the appropriate sources of funds to satisfy the financing needs.
An efficient financial forecasting should consist of the following activities:
- Setting up a projected income statement and balance sheet so that the effect of the operating plan on the firm’s future profit and other indicators of financial performance can be analyzed.
- Determining the need for financing to support the firm’s growth in sales and other investment opportunities.
- Forecasting appropriate sources of financing that can be generated internally as well as externally.
- Setting up proper mechanism of control relating to allocation and utilization of funds.