Financial Forecasts
Managers and external users of financial information are more concerned with what the future holds for an organization than its past history because what has happened has happened and reporting systems are incapable of changing history. Financial forecasts on the other had can be used for budgeting as well as planning purposes. The forecasts offer expected results based on historic facts. Investors and share holders around the world base their decisions on financial and economic forecasts. Public companies are special under constant pressure to perform according to budgeted expectations and forecasts. Failure to do so results in lower stock prices and financial difficulties. Forecasting comes under the broad subject of predictive accounting. The four main aspects of predictive accounting are:
? It improves projecting financial performance by monitoring whether processes are in control. In-control processes are predictable; out-of-control processes are unpredictable.
? It seeks to understand the future.
? It is based on the premise that the actions of an organization are repeatable processes.
? It uses processes that describe the way the organization works.
Financial forecasts assist firms in identifying finance (external and internal) requirements as well as asset requirements. In short financial planning is a process by which firms identify their goals and cost and plan how to meet them. One of the main advantages of financial forecasting is that it identifies interactions between various elements of a firm, for example how inventory changes affect finance costs. It also makes clear which financing options are more suitable in the long term and which ones would cause problems. By incorporating external factors such ...