Different Forecasting Approaches
Experience, Probability, and Correlation
Financial statement forecasting is commonly referred to as "pro forma financial statements" (Gallagher & Andrew, 2003, pg 139) By forecasting financial statements, we can tell if a company will have enough cash flow to purchase supplies, make loan payments or if the company will need to secure financing for the year.
There are two types of budgets important to forecasters, the cash budget which shows projected cash flow in and out of a company and capital budgets which shows planned expenditures for major asset acquisitions. (Gallagher & Andrew, pg 140) The difference between the pro forma financial statements and budget's, is that budgets "contain estimates of future receipts and expenditures for various activities." (Gallagher & Andrew, 2003, pg 136) While pro forma forecasts each the income statement and balance sheet.
Forecasting is how a business can survive. Budgets are the tools financial managers use to create their forecasts. (Wolinski, 2005). As the financial managers we use the budgets to see if we can in fact support the sales forecasts. (Wolinski, 2005). It costs the company money to increase sales by 10 to 15% each year, but without an increase in the sales each year, the company will not grow. (Wolinski, 2005) Forecasting is important to every size company for business survival. (Wolinski, 2005)
References:
Gallagher, Timothy J, and Andrew, Joseph D., 2003, "Financial Management Principles and Practice", by Pearson Education Inc, Upper Saddle River, New Jersey.
Wolinski, R.J. November 28, 2005, Contract, V.P. Profitability Group, short discussion / interview (bio at http://www.furnitureprofits.com/group.html)
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- Forecasting is how a business can survive.
- Budgets are the tools financial managers use to create their forecasts.
- It costs the company money to increase sales by 10 to 15% each year, but without an increase in the sales each year, the company will not grow.