Question

Hi Lisa. You did a great job on your response! I’m glad that you focused on the use of forecasting for both an internal and external perspective. In the 10K annual report filings, management will typically include a very high-level “forward looking information” section that forecasts key figures. Meanwhile, the company would have a full forecast in their internal systems which would not be made public. Class, how detailed should an internal forecast be? Why would management need more detail compared with outside investors?

Answer 1

The modern business world is dynamic and the internal and external factors affecting the business are ever changing. Hence, it has become of utmost importance for the management to keep informed of all the changes happening in the business so that they can be proactive in responding to situations. Forecasting is one such tool which they can use to anticipate the future, predict changes and make appropriate action plans to respond to various situations. They need to take into account all the historical data and also the knowledge of future events likely to take place, which might impact business decisions.                       A forecast should be detailed, reliable and produce accurate results. It should be comprehensive and include all future activities. The assumptions on which the forecasts are based should be valid and consistent, both internally and externally. The various parameters that should be a part of a detailed internal budget are as follows: Revenue projection from sales; projection of operating expenses and thereby deriving the projected income; projecting the assets, liabilities and changes in owners equity and debt leverage; projection of cash flows from operating, investing and financial activities. A detailed budget allows the management to have a step-by-step and item-by-item review of the major parameters of the business such as sales, expenses, and budgets.This helps the management to make strategic decisions for the future. It provides a direction to the organisation and helps it to achieve its long-term goals. Hence, it is very important to have such detailed internal budgets which helps the management in effective decision making.