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Importance of Financial Forecasting

FINANCIAL FORECASTING 4

Importanceof Financial Forecasting

Importanceof Financial Forecasting

Businesshas really become dynamic in the recent past. According to Blodget(2015),competition has been taken back to the basics and how well aparticular company understands the environment in which it operates.As such, financial forecasting has become an integral aspect ofbusiness and a key ingredient as far as gaining a competitiveadvantage is concerned. Blodgetdefines financial forecasting as the exercise of evaluating andestimating current as well as future fiscal conditions of anenvironment with the objective of guiding policy and programmingdecisions of a business (Blodget,2015).Different organizations use different tools to estimate informationas influenced by past, current and projected financials conditions.This is often a continuous exercise either done bimonthly, quarterlyor once every year.

Accordingto Spender(2014),the number one importance of financial forecasting is to improve thedecision making process of a company. Apparently, this is necessaryso as to maintain fiscal discipline and enhance service delivery. Asnoted above, this forecasting looks into both past and currentfinancial conditions of an environment or market. More so, it hasproven very effective in estimating and projecting future conditions.Additionally, Blodget(2015)argue that forecasting plays a significant role in pinpointing bothcurrent and future revenue as well as expenditure trends. Thisinformation is very critical in decision making of any companyseeking to master the market and conform to whatever changes as theycome by. Actually, most organizations put into considerationinformation from financial forecast because in many cases, it ofteninfluences government policies and strategic goals that have a directimpact on the business rules and regulations. Ideally, this impliesthat as a fiscal management tool, financial forecasting is a veryessential element of the annual budget process.

DifferentFinancial Statements and their Importance

Thereare different approaches to evaluating and estimating past, current,and future financial conditions. Most of the approaches entail takingrecords of various financial activities carried out by a particularcompany (Spender,2014).The documentations are captured in terms of written reports that arecollectively referred to as financial statements. Below are the fourmain financial statements and their importance:

  • Statement of financial position – as the name suggests, this financial statement seeks to elaborate the financial position of a business at any given time. It is also referred to as the balance sheet because it often comprise of assets, liabilities and equity as the three main elements (Samonas, 2015). The main significance of this statement is that it keeps track of what the entity owns, what it owes to other parties as well as to its owners.

  • Income statement – this statement keeps track of how a business performs financially over a given period of time. According to Spender (2014), it reports the net profit or losses hence the alternative name Profit and Loss Statement. Its two key elements include income and expenses.

  • Cash flow statement – this statement is more concerned with the manner in which money moves within a business. As such, it keeps track of the movement of money in and outside the business over a period of time. The key segment classifications include financing, investing and operating activities.

  • Statement of changes in equity – this statement elaborates the movement in owners’ equity within measured time. It pays attention to components such as net profit and loses, share capital issued and dividend payments among others (Spender, 2014).

References

Blodget, H. (2015). Financial Forecasting in the Budget Preparation Process. Business Insider, 13(4), 3-11. Samonas, M. (2015). Financial Forecasting, Analysis and Modelling: A Framework for Long-Term Forecasting. Wiley. Spender, J. (2014). Business Strategy: Managing Uncertainty, Opportunity, and Enterprise. New York: Oxford University Press.