Financial Forecasting: Meaning and Applications

Finance is the key factor in an organization and while taking the financial decisions one needs to be very proactive and have a financial budget and forecast ready to have the correct managerial decisions with perfect strategy. Wondering what is Financial Forecast and Financial Budgeting? Here is FinanceShed with a complete guide. And yes, they are different! 

What is Financial Budgeting? 

Financial Forecasting

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A budget is nothing but the expectation of the company about what it wants to achieve in the future specified period. This period is generally for one year. It consists of the company’s financial statements, its cash flows and other supportive documents such as ratio analysis. Many companies make a fixed rigid budget while most of the other companies need a flexible budget and want it to be adjusted throughout the year as business conditions change. 

Also Read: A Brief Study Of The Scopes Of Business Economics

What is Financial Forecasting? 

Financial ForecastingSource: nuvest.net

Future Forecasting is the estimate of the financial outcomes of the companies in the future. This future forecasting is done keeping into consideration the historical data of the company. It is nothing but the prediction of how the company will perform in the future. Forecasting is not only related to profit but also forecasting Revenue and expenses and profit margins. Forecasting can be done only when the company has records of past records, cash flow and fund-flow behavior, The Applications of Financial Ratios, etc. 

Financial Reporting is used to make policy decisions regarding how the company should allocate its finances for future periods. Financial reporting can be changed as and when there are requirements because of a change in operations and business strategy. Also, the forecasting can be flexible as to periods one can have financial forecasting on a monthly, quarterly or yearly basis or even more.  

Financial forecasting can be used as a controlling device in order to have the standards set for the performances of the company. This includes: 

  1. Cash Budget
  2. Pro-forma or provisional Income Statement 
  3. Pro-forma or provisional Balance Sheet
Steps for Creating Financial Forecast

Financial Forecasting

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As we have already seen the meaning of financial forecast here are the steps through which we can forecast the finances.

Step 1

The first and the most important thing you could do is to gather your past records and historical statements. The fashion in which the business has developed and achieved heights is important to know how it will behave in the future. Also, try to have the books of accounts maintained in a way that can give you financial information of historical economic conditions.

Step 2

Financial Forecasting

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Financial Projections. You need to have an idea about the future economic conditions and for that, you net to have some exact projections based on the historical statements and research. The forecast based on only historical financial statements will not give the additional benefit of researches related for the future and only research-based forecast will not consider The Company’s SWOT (Strength, Weakness, Opportunity, and Threats). 

Step 3 

Creating Pro-forma or provisional statements. After you have studied the historical statements it’s time to set a goal or set projection for the period you are willing to do forecast. In this step, one needs to prepare three statements namely Pro-forma Income statement, Pro-forma Balance Sheet and Cash flow statement. Try to cover each and every aspect of the business and its projected incomes and expenses in order to have the exact forecast.   

There are Small Finance Banks for small business ownersThus, all in all, in order to have the financial forecast more precise one needs to learn how the projects and historical statements work. To know more visit Financeshed.