Financial Statement Forecasting is very important in the business sector since predicting the financial position of a company can always fetch profit to companies providing them an edge over other competitors. The forecasting of the financial statements entails a comprehensive method and is a time consuming process. But it is valuable for the business organizations.
The financial statements forecasting begins with the sales forecast and ends with recording the amount of money that would be spent by the company to get those sales. It is a part of the broad category known as ‘predictive accounting’.
Methods of Forecasting Financial Statements:
There are several methods that are applied to forecast the financial statements. The basic, most common and the most important method of forecasting financial statements is – Percentage Sales Method. This method is based on assumptions, that some kind of expenses, liabilities and assets maintain a perpetual relationship with the level of sales. Two things are taken into account while laying out the forecast. These include an external sales forecast and the assumed constant percentages.
Utility of Forecasting Financial Statements
Financial forecasts can be used for chalking out the budget and for planning purposes. The forecasts provide a peek into the results and are based on historical facts and figures. It is calculated by the analyzing the previous records of the company. It is particularly useful for the investors and share holders who invest their money into a company after going through the economic and financial forecasts.
The financial forecasts evaluate the financial position of the company along with providing important insights on the policies that would help the company to gain a better hold on the market. The forecasts help the company identify its financial needs and the asset requirements. Forecast is prepared after taking into account the different elements constituting a company. It also identifies the relationship between the various items of a company that affects the finance of the company. It gives a clear picture of the financial options that can be beneficial for the company. Factors like the inflation rate and interest rates are incorporated in the forecast.
The number of forecasts made by a company depends on its longevity, credibility and experience. If a company has existed for a couple of years it would publish at least 5 forecasts relatively more than that published by a new company that is 2-3 years old.
A lot depends on the forecasts therefore they should be prepared with utmost care.
Last Updated on : 26th June 2013