{"id":24678,"date":"2019-09-24T17:56:20","date_gmt":"2019-09-24T12:26:20","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=24678"},"modified":"2020-08-26T11:58:43","modified_gmt":"2020-08-26T06:28:43","slug":"the-concept-of-financial-forecasting","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/the-concept-of-financial-forecasting\/","title":{"rendered":"The Concept of Financial Forecasting"},"content":{"rendered":"<p class=\"has-drop-cap\">The concept of forecasting makes utilization of past data to predict future outcomes. Forecasting is a vital mechanism widely used to make financial and management decisions. Financial forecasting is used to make future projections about the expenses and revenue of the business and thus predict the profit potential of the company. The screening comprises profit and loss statements, cash flow, balance sheets, etc. <\/p>\n\n\n\n<p>The process of financial forecasting involves using\nhistorical data of sales, revenue, and factors of influence to make future\nprojections. It is then studied by experts to conclude how the enterprise will\nperform in the target period.<\/p>\n\n\n\n<div class=\"embed-responsive embed-responsive-16by9\">\n  <iframe class=\"embed-responsive-item\" src=\"https:\/\/www.youtube.com\/embed\/GyvO3ptXMvI\" allowfullscreen=\"\"><\/iframe>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\">The Need for Financial Forecasting<\/h2>\n\n\n\n<p>Business operations take place in an environment of uncertainty. Thus any cure to reduce the uncertainty of business outcomes is highly productive for organizational growth. Such information is not only a valued asset for the entity but also a necessity of the business. Additionally, it also helps to stay ahead of competitors by having a better idea of future risks and opportunities. <\/p>\n\n\n\n<p>A forecast is monitored on a regular <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a> and updated on\nregular intervals in order to cover up any deviation. This routine scrutiny of\nforecast projections helps to analyze the predictions with actual results.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Benefits of Financial\nForecasting<\/strong><\/h2>\n\n\n\n<ul><li>It helps to set the standard of\nperformances and act as a base to evaluate real-time results.<\/li><li>It helps in the timely\narrangement of funds as a result of the financial projection of funds needs and\nrevenue potential.<\/li><\/ul>\n\n\n\n<ul><li>It helps in the optimum\nutilization of resources and reduces the non-performing resources of the\norganization.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\">Process of Financial Forecasting <\/h2>\n\n\n\n<figure class=\"wp-block-image is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/222-700x1024.png\" alt=\"Process of Forecasting \" class=\"wp-image-24871\" width=\"639\" height=\"935\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/222-700x1024.png 700w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/222-205x300.png 205w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/222-768x1123.png 768w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/222.png 774w\" sizes=\"(max-width: 639px) 100vw, 639px\"\/><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">1. Gather Financial Information <\/h3>\n\n\n\n<p>The\nfirst and foremost step to start the forecasting procedure is to gather\nhistorical records of the business. The method of forecasting helps to makes\nprojections on the basis of past records and performance of the entity.\nProjecting without taking historical data into records is mere expectation\nwithout any concrete evidence.<\/p>\n\n\n\n<p>An organization needs financial statements <strong>bookkeeping<sup><a href=\"https:\/\/en.wikipedia.org\/wiki\/Bookkeeping\">[1]<\/a><\/sup><\/strong> transactions with updated records. Once the records are gathered, then the organization can proceed to the process of forecasting.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. Historical Data based Vs. Research-Based Projections<\/h3>\n\n\n\n<p>Once\nthe necessary data is available, the next is to determine the type of forecast\nto proceed. There are two approaches to make a forecast. The kind of forecast\nlargely depends upon the need of the organization. Even though every forecast\nhas elements of historical data and <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> research. However, the choice of\napproach should not undermine the purpose of making the forecast. Let us now\nread about the two in detail.<\/p>\n\n\n\n<p><strong>Historical Data-Based Forecast <\/strong><\/p>\n\n\n\n<p>Historical\ndata based forecast uses financial statements of previous years to make future\nprojections. The experts take financial statements and balance sheet of past\nyears to make projections about the future performance of the entity<\/p>\n\n\n\n<ul><li><strong>Pros<\/strong><\/li><\/ul>\n\n\n\n<p>The\nbenefits of this approach to the forecast are that it can be conducted in a\nshort time without taking a hefty toll on time, costs, and resources.\nAdditionally, it helps to make a rough estimate of business growth. <\/p>\n\n\n\n<ul><li><strong>Cons<\/strong><\/li><\/ul>\n\n\n\n<p>The\ndisadvantage is that it ignores the external factors that impact the growth of\nthe organization, such as market trends and factors. Additionally, it cannot be\nused for making a presentation for investors. <\/p>\n\n\n\n<p><strong>Research-Based Forecast<\/strong><\/p>\n\n\n\n<p>The\nforecast that is based on the research-based premises is called a\nresearch-based forecast. This approach to financial forecast takes broad\nfactors into consideration that are potential influences on business growth.<\/p>\n\n\n\n<ul><li><strong>Pro<\/strong><\/li><\/ul>\n\n\n\n<p>The\nadvantage of a research-based forecast is that it provides an in-depth and\nextensive view. This is the kind of forecast that can be presented to investors\nand stakeholders as it is considered the most realistic forecast among the two.<\/p>\n\n\n\n<ul><li><strong>Cons<\/strong><\/li><\/ul>\n\n\n\n<p>The\ndisadvantages are that the research-based forecasting is time-consuming and\nexpensive. Moreover, it is costly as you may need the help of experts to\nconduct the forecast.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Preparation of Pro Forma Statements<\/h2>\n\n\n\n<p>Pro\nforma statements are the statements that are prepared using the forecast\nprocess. They are the presumptive income statements and balance sheets.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Preparation of Pro Forma Income Statements<\/h3>\n\n\n\n<figure class=\"wp-block-image is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/transtutors001_da6e04db-1548-48f6-ab56-a7c9d7c348e1.png\" alt=\"Preparation of Pro Forma Income Statements\" class=\"wp-image-24825\" width=\"661\" height=\"450\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/transtutors001_da6e04db-1548-48f6-ab56-a7c9d7c348e1.png 607w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/transtutors001_da6e04db-1548-48f6-ab56-a7c9d7c348e1-300x205.png 300w\" sizes=\"(max-width: 661px) 100vw, 661px\"\/><\/figure>\n\n\n\n<p>The\npro forma income statements are prepared with the help of historical data\nblended with market research. The process involves making reasonable estimates\nabout the possible earnings and expenses of the company. The estimation of the\nsales figure for the coming period helps to shape the complete statement. The\nsales figures are estimated on the basis of numbers from previous years, along\nwith market research and economic factors.<\/p>\n\n\n\n<p>Estimates\nabout production expenses are next to being taken into account. The production expenses\ncomprise production cost, wage rates, overhaul expenses, etc. Projections for\nthe cost of production are made using the previous year&rsquo;s cost of production in\ncomparison to sales made in that period. <\/p>\n\n\n\n<p>The\nnext element of estimates for this statement is administrative expenses,\nselling expenses and interest and taxes. Administrative expenses and selling\nexpenses are not highly elastic in nature, and hence they can be predicted\naccurately.<\/p>\n\n\n\n<p>The\nincome after administrative and selling expenses deductions is income before interest\nand taxation. The amount of interest and taxation can be predicted with a low\nrisk of deviation.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Pro Forma Balance Sheet&nbsp; <\/h3>\n\n\n\n<figure class=\"wp-block-image is-resized\"><img decoding=\"async\" loading=\"lazy\" src=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/2019-09-20_181920.jpg\" alt=\"Pro Forma Balance Sheet  \" class=\"wp-image-24824\" width=\"706\" height=\"530\" srcset=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/2019-09-20_181920.jpg 800w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/2019-09-20_181920-300x225.jpg 300w, https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/2019-09-20_181920-768x576.jpg 768w\" sizes=\"(max-width: 706px) 100vw, 706px\"\/><\/figure>\n\n\n\n<p>The pro forma balance sheet is prepared using the information from the pro forma income statements.&nbsp;However, the information is not sufficient to make satisfactory projections. Balances of previous years are also included to drive the changes from the old balance sheet to the pro forma balance sheet.<\/p>\n\n\n\n<p>The pro forma balance sheet contains the forecasted value of fixed assets after infusing the amount of depreciation for the coming year. Current assets will be charged based on the period of credit allowed to creditors. <br>\nThe amount of inventory will be forecasted based on the production plan of the entity for the following year. Here, the amount of cash place an important and diverse role. The cash balance will be shown at the lowest. Interestingly any difference between the assets and liabilities side of the Pro forma balance sheet will be balanced from the cash in hand.<\/p>\n\n\n\n<p>For the liabilities side, preplanned redemption of the debenture and fresh issue of shares and debentures should be taken in to account. Additionally, past and future data of liabilities should be taken into account to account for outstanding liabilities for the pro forma balance sheet. Provisions for tax and dividends are prepared by taking the figures of the previous year balance sheet and pro forma income statements.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Projected Cash Flow<\/h3>\n\n\n\n<p>The projected <a href=\"https:\/\/enterslice.com\/cash-flow-management\"><strong>cash flow statement<\/strong> <\/a>depicts the assumed amount of cash that will change hands in the coming year. The statement shows light on the cash requirements of the following year. It helps to decide how much additional funds from equity or debt a business has to raise to meet the cash requirements. The amount of cash requirement is proportionally dependent on the production and expansion plan of the business enterprise. <\/p>\n\n\n\n<p class=\"text-left\"><b>Read our article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/enterslice.com\/learning\/cash-flow-forecasting-in-financial-model\/\">Cash Flow Forecasting in Financial Model\n<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The concept of forecasting makes utilization of past data to predict future outcomes. Forecasting is a vital mechanism widely used to make financial and management decisions. Financial forecasting is used to make future projections about the expenses and revenue of the business and thus predict the profit potential of the company. The screening comprises profit [&hellip;]<\/p>\n","protected":false},"author":14,"featured_media":24680,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2415],"tags":[2750],"acf":{"service_id":"230"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Concept of Financial Forecasting - Enterslice Fintech<\/title>\n<meta name=\"description\" content=\"Forecasting is a vital mechanism widely used to make financial and management decisions. Read the full Concept of Financial Forecasting.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/the-concept-of-financial-forecasting\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Concept of Financial Forecasting - Enterslice Fintech\" \/>\n<meta property=\"og:description\" content=\"Forecasting is a vital mechanism widely used to make financial and management decisions. Read the full Concept of Financial Forecasting.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/the-concept-of-financial-forecasting\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-24T12:26:20+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-08-26T06:28:43+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/imgpsh_fullsize_anim-1-1.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"630\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Akash Dubey","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/04\/DSC_04891.jpg","authorDescription":"Akash Dubey is a Law Graduate and works as an\r\nAdvisor at Enterslice. He is proficient in Legal\r\nand Financial Advisory. His expertise in the\r\nskills of Legal and Financial Research is an aid\r\nto his strengths as an Advisor.","postViews":1133,"readingTime":4,"nextPost":{"id":24950,"slug":"the-introduction-of-alternate-minimum-tax-in-india"},"prevPost":{"id":24911,"slug":"corporate-tax-rate-cut-to-increase-the-manufacturing-of-electronic-vehicles-parts"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/imgpsh_fullsize_anim-1-1.jpg","postTerms":"Finance","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/24678"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=24678"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/24678\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/24680"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=24678"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=24678"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=24678"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}