Question

Your task is to write a procedure or checklist of things that are required to prepare financial forecasts and projections of an organisation. Please ensure you include the following in your procedure/checklist:

1. Timetable preparation
2. Identifying assumptions and parameters
3. Issuing instructions for preparation of forecasts and projections
4. Collecting and analysing data
5. Documentation of results
6. Approval protocols

You will be required to provide the procedure and checklist to the assessor.

Answer 1

Background:

The purpose of the financial forecast is to evaluate current and future fiscal conditions to guide policy and programmatic decisions. A financial forecast is a fiscal management tool that presents estimated information based on past, current, and projected financial conditions. This will help identify future revenue and expenditure trends that may have an immediate or long-term influence on strategic goals, or community services. The forecast is an integral part of the annual budget process. An effective forecast allows for improved decision-making in maintaining fiscal discipline and delivering essential community services.

Define Assumptions:

The first step in the forecasting process is to define the fundamental issues impacting the forecast. The results of this initial step will provide insight into which forecasting methods are most appropriate and will help create a common understanding among the forecasters as to the goals of the forecasting process. There are four key questions to consider when defining assumptions for the forecast:

1. What is the time horizon of the forecast?
2. What is the objective of the organization. On the other hand, an objective forecast seeks to estimate revenues and expenditures as accurately as possible, making it easier to balance the budget, but increasing the risk of an actual shortfall. Therefore, the organization should be transparent concerning its own forecasting policy and underlying assumptions.
3. Be aware of current laws or expected changes in laws that affect forecasts.
4. What are the major revenues and expenditure categories?

Instructions for preparation of forecasts and projections:

To support the forecasting process, use statistical data as well as the accumulated judgment and expertise of individuals inside and perhaps also outside the organization. For instance, department heads may have an insight into activities within their own section. This step is designed to increase the forecasters expert knowledge about the forces impacting revenues and expenditures. This would also include events that could cause a disruption in the operating environment and in prevailing trends. Both are important for forecasting because they allow the forecaster to more intelligently build quantitative models and to make a forecast using his or her own judgment. Assumptions should be documented for future reference, so the financial forecasting process has some basis to start from at the beginning of each cycle. Also, become familiar with other longer-term planning efforts of the organization or other organizations that impact financial decisions and the fiscal environment. Such plans might include comprehensive development and/or capital improvement programs.

Data Analysis:

he analysis should include an examination of historical data and relevant economic conditions. This improves the quality of the forecast both by giving the forecaster better insight into when and what quantitative techniques might be appropriate and also is useful for supplementing forecasting methods. The forecaster is looking for consistent patterns or trends. In particular, the forecaster should look for evidence related to:

1. Business cycles. Does the revenue (or expenditure) tend to vary with the level of economic activity in the community or are they independent of cycles? How do broader market forces impact key expenditures, such as pension contributions affected by investment returns?
2. Demographic trends. Are population changes affecting service demands and/or revenues?
3. Outliers and historical anomalies. Does the data contain any extreme values that need to be explained? It could be that these represent highly anomalous events that dont add to the predictive power of the data set.
4. Relationships between variables. Are there important relationships between variables that could aid in forecasting?