A company’s planning activities are centered around finances, because the language and plans are states in terms of financial states, and measures to evaluate plans are financially focused as well. Furthermore, money remains the most critical resource for a commercial organization. Since practically every corporate action has financial consequences, the viability of any plan is seen through the lens of whether it is attainable in the context of limited financial resources (Higgins, 2019). Therefore, the process of financial forecasting can be described as using historic data to predict the financial future in a wide variety of contexts (Investopedia). Business managers may use forecasting to predict sale and plan operations, as many other practices such as cash flow, hiring, or projects depend on having the revenue to ultimately fulfill them. One of the most common tools used are pro forma financial statements, which is a prediction of a company’s financials at the end of the specific forecast period. These can vary from detailed plans and budgets to simply rough estimates (Higgins, 2019). Other applications of financial forecasting can include investors predicting market trends and government economic agencies forecasting economic trajectories to guide policy.
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It is important to distinguish forecasting from budgeting. Budgeting is a regular required practice where management plans expenses, quantifies expectation of revenues, and ultimately sets the financial direction for a company in the short-term (usually no more than a year), it is a baseline to which actual results are compared. Financial forecasts are long-term, used to determine how companies should allocated their budgets in the future, helping to generate long-term strategy in determining the viability of major projects, and unlike budgeting, it does not analyze the difference between forecasts and actual performance. Therefore, it is a difference of quantification and estimating. Financial forecasting remains important for companies, providing insight to business performance in the past and how it compares to the future. In turn, it allows executives to establish business goals that are both feasible and will help guide the long-term direction of a company to achieve the planned objectives and performance.
Higgins, R. (2019). Financial management (12th ed.). McGraw-Hill.