FINANCIAL FORECASTING

FINANCIAL FORECASTING
Forecasting is a process of predicting or estimating the future based on past and present data. Forecasting the financial planning process involves two main aspects: cash planning and profit planning. These processes allow the company to make informed decisions when planning future financial decisions because current and past market trends are taken into consideration. Forecasting provides information about the potential future event and their consequences for the organization. It may not reduce the complication and uncertainty of future. However, it increases the confidence of the management to make important decision.

Why prepare a financial forecast?

Demonstrates the financial viability:Allows to measure variation:Guide your business:Provides a benchmark:Identifies potential risks and cash shortfalls:Provides an estimate of future cash needs and whether additional private equity or borrowing is necessary. Assists you to secure a bank loan or other funding. Lenders and investors require financial forecasts to show your capacity to repay the loan.

FINANCIAL FORECASTING TOOLS

Percent-of-Sales:Business owners and managers review previous income statements to determine a sales trend for a specific time period. Using this sales figure, owners and managers can calculate cost of goods sold and expenses as a percent of sales.

Regression Analysis:Regression analysis analyzes the relationship between a single dependent variable and one or more independent variables.

Financial Modeling:Financial modeling can use economic or corporate financial models to estimate sales or other financial forecasts. Decision trees, game theory or internal rate of return are forecasting tools that take internal and external information into account when computing financial forecasts.

TECHNIQUES

Delphi Financial Forecasting:This financial forecasting technique uses research to identify the problem within a company requiring forecasting.

Percent of Sales Method:The method takes sales figures from last year using the company's balance and income sheets to make predictions on future sales figures. The forecaster assumes items on the business's balance and income sheets will increase in value as long as sales continue to rise.

Moving Averages Technique:The forecaster uses previous company financial and income statements to weigh the sum carried through over time to produce an estimation of how the value of the sum may increase or decrease.

TECHNIQUES

Consumer Survey Forecasting:A company may use consumer survey forecasting as a means of determining the median income and spending power in a given segment of the market. A forecaster can accumulate this information through informal customer surveys at business locations, using social networking sites or through street team questionnaires.

CHALLENGES & LIMITATIONS

Unpredictable Economy:-

Unknown Competitive Threats:-

Unforeseen Events:-

Unpredictable Consumer Behaviour:-

Not Enough Data:-

FINANCIAL FORECASTING PROBLEMS

Federal Reserve

Legislation

Natural Disasters