Predicting the future is difficult, but it is a very important part of the financial health of a company, and is incredibly important when it comes to budgeting year by year. A financial forecast is an attempt at predicting this future, and it hugely improves a company’s knowledge about itself, as, after all, knowledge is power.
Internal data
A company needs to know exactly what its income and outgoings are, how they balance, and how they are likely to look in the future.
Once a company knows this, it can begin to budget and to plan.
Using both internal accounting and sales data, the future finances of the company can be worked out to a fairly accurate degree. If a company makes a lot of profits in the summer months, but not so much in the winter, and it has been that way every year since the company started, then it can be predicted that the year the accountant is currently forecasting will likely follow the same trend.
Obviously, forecasting the finances of a company is a lot more complicated than this hypothetical example, but by looking closely and in minute detail at the financial data a company holds, the future can be somewhat predicted.
External Data
Forecasting can’t be done only on internal data. An accountant will use the trends and predictions of the current market, whichever market the company is involved in, the state of stocks, and the economy as a whole to build up an accurate picture of how the company will fare over a certain period of time into the future.
There is no point focusing only on internal data, as it is necessary to know how the internal picture that this will create will hold up to the external economy.
Why forecast?
It is important for a company to know what financial standing it will be in for the future. It means that the company will know:
- how much to budget in total
- which departments in the company will need more or less budgeting
- how many resources it needs to purchase
- where and how far it can expand the business
- and much more.
The forecast is important to investors, both current and potential, and helps to paint a picture of the company overall.
