Definition of Financial forecasting
Forecasting in general means studying, estimating and predicting future based on the past trends, numbers and circumstances.
Financial forecasting of a business means estimating financial direction of the organization i.e. financial budgeting, revenue forecasting, future Financial expenses, sales and demand, future potential investments projects etc.
Organizations do forecasting because they want to plan properly for the uncertain future.
Brief Explanation of Financial forecasting
Forecasting helps businesses to look into the future and allocate and plan their activities accordingly.
Advantages of Financial Forecasting:
Analyzing and planning are pivotal before taking any step and same way financial forecasting helps business in the following ways:
- Knowing a bit about the future means better decision making, better investments.
- Helps you to take your business to the correct direction
- Identify risks and opportunities.
- Future cash need for the business.
- Forecasting is done by analyzing precious trends and market data and hence experience can teach you what to do in future.
- Preplanning and less unpredictable situations.
Dis Advantages of Financial Forecasting:
- Budgeting can never be 100 % accurate, there are always variances.
- Past trends and experiences may not always work well in the future.
- In current era of technology and rapid innovation future has also become more unpredictable.
- Sometimes despite having complete information things do not work out and that’s because of the implementation deficiencies and not the forecasted report.
This is job of Finance and management department in any organization and they are normally called Analysts. Analysts work on different Financial models and tools to predict the future numbers.
Forecasting is done for 1 year to 10 years but the more very are close to the future the better the picture. Hence forecasting is done on rolling basis too. Means we keep re-evaluating our numbers as we keep moving towards the future.