Why is Forecasting Important to an Organization?

Forecasting is the process by which companies ponder and prepare for the future. It involves predicting the future outcome of various business decisions. This includes the future of the business as a whole, the future of an existing or proposed product or product line, and the future of the industry in which the business operates, to name a few. Forecasting is used to answer important questions, such as:

How much profit will the business make?

How much demand will there be for a product or service?

How much will it cost to produce the product or offer the service?

How much money will the company need to borrow?

When and how will borrowed funds be repaid?

Businesses must understand and use forecasting in order to answer these important questions. This helps the company prepare for the future. It also helps the organization make plans that will lead to becoming a financially successful business. This article will discuss the reasons financial forecasting is important to an organization.

Why is Forecasting Important to an Organization?

Financial forecasting is important for several reasons. First, it enables management to change operations at the right time in order to reap the greatest benefit. It also helps the company prevent losses by making the proper decisions based on relevant information. Organizations that can create high quality and accurate forecasts are able to "see what interventions are required to meet their business performance targets" (Vadasz).

Forecasting is also important when it comes to developing new products or new product lines. It helps management decide whether the product or product line will be successful. Forecasting prevents the company from spending time and money developing, manufacturing, and marketing a product that will fail.

Stockholder expectations highlight another reason behind the importance of forecasting. Public companies experience scrutiny and pressure for short-term performance from investors. Operational results will be examined by investors and investment analysts, and actual results that differ from forecasts will be bad for the company and its stock price. This is because both meeting predictions and exceeding predictions will reduce investor confidence. This will cause investors to believe that the company does not understand its own business model.

Conclusion

The elements of doing business are constantly changing. Interest rates rise and fall, customer preferences change, suppliers go out of business, and the list goes on and on. As the factors that affect business change, the company forecasts must also change. In this time of rapid change, accurate and timely forecasts have become even more important. Recognizing this is the first step in becoming a successful organization.

References

Vadasz, T. "Accurate Forecasting". Sarbanes-Oxley Compliance Journal website. URL: http://www.s-ox.com/dsp_getFeatureDetails.cfm?CID=6546