Question

Discuss the importance and process of financial forecasting. Provide examples of both revenue and expense forecasting methods.

Answer 1

Ans) Financial forcasting is a method adopted to find the future revenues and expenses figures on tge basis of which Profit and loss accounts figures are estimated. This estimation is done generally for one year.It helps to find out the risks and potential growth opportunity and helps in developing plans and strategies to make the best use of opportunites and facilitate the backup plan for the risk or threat that will come in near future.The first step in financial forcasting is to determine the objectives of forcastes and the time frame for the forcaste. The objective of forcasting can be related to type of risks that will arise , the legal and economical and political change in the comming future.The revenue and expenditure fluctuations.The impact of new technologies in the business and the environmental issues.The second step is to gather information , from primary and secondary sources..Then a detailed analysis of the gathered information takes place with proper tools of forcastes like regression abalysis , Calculation based of Statistical inferences are done , hypothesis are tested and conclusions are drawn.Then explanatory analysis are developed and trends are identified through the examinations of the data.The methods uses extrapolation methods are used to analysis historical data and through which future figures are identified.The last step is the implementation which involves developing of the financial models and allocation of resources and formulation of strategies.In the expense forcasting we determined the overheads as fixed and variable .Then we estimate the change percentage and arrived at the final forcasted figure..The revenue forcasting are of two types the conservative and aggressive.In the previous one the approach is the price per unit is kept low and the staff is not kept big with low advertisement expenses as against aggressive forcasting were the price is kept high per unit and new products are launched frequently .The last is to calculate the check ratio such as gross profit margin, operating ratio etc