Financial forecasting is the studied predictions a firm makes after carefully weighing their incomes and expenditure then making future plans. Decisions will be made after information obtained from identified trends of internal accounting and sales data in comparison to the external market and the economic indicators that will affect the financial status of the firm in the future. Projections on the other hand are the predicted forecasted sales. Financial forecasting and projections help in the assessing the strength of the firm and any increase or decrease in the expected sales.
Financial forecasting is essential for the growth of a firm as it aids in the planning of the firm. For example, it is important for an Uber taxi driver to plan on his or her fuel usage to avoid running out when at work. In addition to that, it is a requirement by financers. For investors to invest in a firm; a well stipulated financial forecast is needed so that they can analyze the future and estimate the success of the firm. No investor will invest in a dying business. Moreover, when the firm requires finances in the future, a detailed financial forecast will come in hand since when they asking for a loan from the bank it will be necessary to present one for one to be given a loan (Bohoff, 1994).
Delegate your assignment to our experts and they will do the rest.
Projections are essential in a business and must be accurate and up to date. This is the case because projections are required to secure loans from the bank. The bank will use the sales projections to make decision on issuing the loan since they will be in a position to know the time frame the firm makes profit. In addition to that, projections help in the drafting of a budget and planning in the other fields in the firm. Moreover, promising projections are used as a marketing strategy. They will be used to capture the eyes of potential investors and shareholders (Bohoff, 1994).
Forecasting and projections are important to a firm as it helps in accountability. Previous financial statements and reports aid greatly in the management of finances. Close monitoring made on the startup cost, sales made, cash flow, expenses incurred, and the cost of goods sold need to be accounted. The firm can then come up with strategies on how to solve any financial difficulties experienced. In addition to the mentioned benefits, forecasting and projections improve the accuracy of the firm. Accuracy will be achieved through regular intervals which will aid in improving the planning and budgeting strategy of the firm; thus allowing growth in the firm (Taparia, 2003).
Three important financial statements are currently in use; balance sheets, statement of profit or loss and statement of cash flow. Financial statements give the firm and the analysts a vivid picture of the financial condition of the firm. Information obtained from the financial statements help in writing the final financial report. To begin with, a balance sheet, also known as statement of financial position shows the solvency of the firm. Balance sheets show the assets a firm has as well as the liquidity of the firm. Secondly, the statement of profit or loss, also known as income statement in the financial world is vital as it shows how much the firm spent, the amount made and the net results after a given period of time. Finally, statement of cash flow is the backbone of the firm since cash is what sustains the operations of the firm. Proper managing of cash flow makes the firm to grow as it allows for blooming of the operation, investment and finances (Taparia, 2003).
References :
Bohoff, E. J. (1994). Financial Forecasting for Business and Economics . London: Academic Press.
Taparia, J. (2003). Understanding Financial Statements: A Journalist’s Guide . Oak Park, IL: Marion Street Press.
