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Boundless Finance
Forecasting Financial Statements
The Role of Financial Forecasting in Planning
Finance Textbooks Boundless Finance Forecasting Financial Statements The Role of Financial Forecasting in Planning
Finance Textbooks Boundless Finance Forecasting Financial Statements
Finance Textbooks Boundless Finance
Finance Textbooks
Finance
Concept Version 6
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Strategic Planning

The financial forecast is a key input to strategic planning, a firm's process of defining strategy and making decisions about allocating resources.

Learning Objective

  • Explain how financial forecasting influences a company's strategic planning


Key Points

    • Using historical internal accounting and sales data, in addition to external market and economic indicators, a financial forecast is an economist's best guess of what will happen to a company in financial terms over a given time period, which is usually one year.
    • Financial forecasting is often helped by financial modeling processes. Financial modeling is the task of building an abstract representation (a model) of a financial decision-making situation.
    • Assumptions play a key role in financial forecasts and can affect the way the forecasts predict the outcomes of decisions made on the corporate level.

Terms

  • financial modeling

    the task of building an abstract representation (a model) of a financial decision making situation.

  • financial forecast

    estimate of future financial outcomes for a company or country

  • strategy

    A plan of action intended to accomplish a specific goal


Full Text

Strategic Planning

Strategic planning is an organization's process of defining its strategy, or direction, and making decisions about allocating resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action.

A financial forecast is an estimate of future financial outcomes for a company. Using historical internal accounting and sales data, in addition to external market and economic indicators, a financial forecast is an economist's best guess of what will happen to a company in financial terms over a given time period—which is usually one year. Often, the forecaster's own assumptions and beliefs will be used to guess future growth rates and potential events that will affect the numbers on a financial statement.

Arguably, the most difficult aspect of preparing a financial forecast is predicting revenue. Future costs can be estimated by using historical accounting data; variable costs are also a function of sales. Unlike a financial plan or a budget, a financial forecast doesn't have to be used as a planning document. Outside analysts can use a financial forecast to estimate a company's success in the coming year.

Strategic Planning

Financial forecasting is essential for a company's strategic planning, management, and organization.

Financial forecasting is often helped by processes of financial modeling. Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation. This is a mathematical model designed to represent a simplified version of the performance of a financial asset or portfolio of a business, project, or any other investment. Financial modeling is a general term that means different things to different users; the reference usually relates either to accounting and corporate finance applications, or to quantitative finance applications.Typically, financial modelling is understood to mean an exercise in either asset pricing or corporate finance, of a quantitative nature. In other words, financial modelling is about translating a set of hypotheses about the behavior of markets or agents into numerical predictions; for example, a firm's decisions about investments or investment returns. Once again, these are assumptions that will factor into the financial forecasting and planning for the corporation. Once the financial statements are forecast, one can attach a value to the firm, and see what changes need to be made to put the company in a better financial position.

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