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Explain about forecasting in financial management.
The term forecasting refers to predication of future with the given circumstances. In forecasting, both macro and micro economic factors will be considered. Financial forecasting tells about company’s future action.
Financial forecasting made through projected financial statements (income statements, balance sheets and cash flows). It helps to make decisions like capital investments, requirement of working capital, funds requirement etc.
Features of forecasting include −
- Relates to future events.
- Depends on historical and current events.
- Predication of future events.
- Forecasting techniques.
Quantitative and qualitative techniques are two types of financial forecasting techniques, which are explained below in detail.
Quantitative techniques
- Casual methods.
- Simple linear and multiple regression.
- Days sales technique.
- Percentage of sales technique.
- Time series methods.
- Financial statements.
- Projected cash flow and fund flow statements.
- Projected income statements and balance sheets.
Qualitative techniques
- Executive opinions.
- Market research.
- Delphi method.
- Reference class forecasting.
- Scenario writing.
- Sales force polling.
Advantages of forecasting include −
- Valuable insight.
- Learn from the past.
- Decrease cost.
Disadvantages of forecasting include −
- Not accurate.
- Time consuming.
- Resource intensive.
- Costly.
Updated on: 12-Aug-2020
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