1
Although some managers use the terms forecasting, planning and modelling indiscriminately, they are not the same things. A forecast is a prediction about a future condition or situation. In terms of a business, financial forecasting means looking ahead to a point in the future and trying to estimate the financial situation that the company will be in at that time. Decisions about whether to spend more or less money on a project today will be determined by financial forecasting. A company needs to feel secure that their future finances will be able to recuperate the money they have spent and keep their bank balances healthy.

2
Most organisations with strong financial departments spend a lot of time and effort on financial forecasting. The nature of the business world means that managers need to look ahead and plan for a future that is in no way certain. Financial forecasting helps a company to make important decisions today that will affect the company in the future. These decisions affect things like whether to spend or borrow money, where to invest or when to start a new project.

3
The difficulty with financial forecasting is that it involves uncertainty. The future is uncertain and a single financial policy can have numerous repercussions. However, when businesses draw up strategies to deal with risk management they build in forecasting procedures which strengthen the company’s position. Risk cannot be eliminated by financial forecasting but it is beneficial for a company to have a better understanding of what the future could hold. Companies accept that uncertainty is an integral part of any financial forecast.

4
This is a difficult question to answer. What is clear however is that managers should always establish how much accuracy they can expect from a financial forecast. Managers have to decide how much money is worth investing in a forecasting project which is only going to have a certain amount of accuracy. Sometimes it is the case that the benefits of a financial forecast are not worth its cost.

5
Another important thing to consider is the timing of a financial forecast. Forecasts necessarily need to be updated because new information comes to light and things are constantly changing. So managers need to think about a series of financial forecasts, not just one. The question then becomes “how often do forecasts need to be made?” Each time there is an updated forecast there will be an additional cost. Linked to this is the need to establish how far into the future a forecast needs to reach. A ten year forecast will be more complicated – and expensive – than a two year forecast.