Most organization prepares long term plans so as to enhance effective of accomplishment of goals and objectives that are useful for the growth and development of an organization. Forecasting refers to the process of predicting the future and market trends while using existing data and facts in an organization. The directions of the economy, stock market and the individual securities market of an organization are determined through taking into account its technical and fundamental statistics.
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Importance of forecasting in organizations
Analysts can predict the outcomes that may happen in the future within an organization with the use of the forecasting techniques. Forecasting helps an organization to know how much profit their businesses generate within a specified period of time, demand for their products or services in the market. The techniques also show amount of money a company requires to run the affairs of the organization and the repayment period of the borrowed money.
The other reasons for carrying out forecasting activities are that it enables the management to change its operations at right time in order to generate profits for the organization and also helps to avoid losses through making proper decisions that are based on relevant information. Forecasting helps the management of an organization to understand the product lines that should be implemented within an organization so that it may be successful in the market and thus enables a company to spend less time and money in developing, manufacturing or marketing a product that may fail in the market.
Similarities and differences of forecasting and budgeting process
The forecasting process is the process that involves persuading individuals to understand the future events and after which they prepare a forecast that is commensurate with the events that may happen in the future. According to Allen, he states that process involves defining how information should be gathered and reconciled consistently. It also defines the weight that should be placed on a mathematical model versus input from the participant so that the final consensus for a forecast can be effectively implemented. A well-organized financial forecasting process can help the management of organizations to set up money-generating projects that can bring about development within an organization.
According to Scott, he states that the budget process involves the preparation of a working operational plan that is approved by relevant authorities who acknowledge it as a legal working document. The benefits derived as a result of using this process are; it provides standards that gauge how actual performance should be measured, makes managers pay attention to current and future operations, allows managers to reassess goals, obligations and means followed when accomplishing them. The other benefits are that it helps the management to coordinate the overall operations of the organization and to assist managers to understand when change should take place within the organization.
The similarities of the budgeting and forecasting process are that they form part of a framework that is used to assess the performance of employees within an organization. Both processes are used by the executives so that they can derive information that enhances the effective decision-making process within an organization.
The forecasting and budgeting process can be differentiated in the following ways; budgeting is the process of predicting and controlling the spending power of the management of the organizations. It involves a periodic negotiation cycle that is set up annually to monitor budgets daily while forecasting is the process that involves translating planning and programming decisions into specific projected plans that are easier to handle and to monitor.
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Projected or forecasted (pro forma) financial statement
Pro forma or the projected financial statement is a statement that is prepared based on assumed events and transactions that have not yet occurred within an organization. They focus on future events that are based on assumptions and also allow the management to be creative and flexible. It also takes into account issues that involve the dynamic environment and a variety of possible alternatives that are associated with this type of financial statement. The pro forma financial statements are used to analyze the different kinds of financial information that is useful to an organization which is prepared at the beginning of every financial cycle.
According to Scarborough, he states that the following financial statements are examined when a company is restructuring its operations these are: amalgamation statements, financing of the company’s stock, debt, institutional subsidy or its external grant, capital investment in a plant, or other assets. It is also applied when a company wants to expand its production capacity, launch a new product line, or any other situation that has a financial implication.
The role of the pro forma financial statement in the budgeting process is that it helps the analyst to prepare budgets, allocate their limited marketing resources, and to control their marketing programs to run the affairs of n organization in an efficient and effective manner
Organizations need to take into consideration the factors that can bring development within an organization. The budgeting and forecasting techniques are useful to an organization as they help an organization to set up good strategies that can improve, the performance of an organization.
- Allen, Beck, R. “Forecasting: Fiction and Utility in Jail Construction Planning” Correctional Building News, 1998. Web.
- Scarborough, N.M. Effective small business management. New York: Merill, 1998.
- Scott, Armstrong, J. (ed.), Principles of forecasting: a handbook for researchers and Practitioners (in English). Norwell, Massachusetts: Kluwer Academic Publishers. 2001.