HOME

TheInfoList



OR:

A financial forecast is an estimate of future financial outcomes for a
company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...
or
project A project is any undertaking, carried out individually or collaboratively and possibly involving research or design, that is carefully planned to achieve a particular goal. An alternative view sees a project managerially as a sequence of even ...
, usually applied in
budgeting A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environme ...
,
capital budgeting Capital budgeting in corporate finance is the planning process used to determine whether an organization's long term capital investments such as new machinery, replacement of machinery, new plants, new products, and research development projects ...
and / or valuation; see . Depending on context the term may also refer to listed company (quarterly)
earnings guidance In financial reporting, earnings guidance or simply guidance is a publicly traded corporation's official prediction of its own near-future profit or loss, stated as an amount of money per share; see Earnings call. Earnings guidance is usually ...
. For a
country A country is a distinct part of the world, such as a state, nation, or other political entity. It may be a sovereign state or make up one part of a larger state. For example, the country of Japan is an independent, sovereign state, whi ...
or
economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...
, see
Economic forecast Economic forecasting is the process of making predictions about the economy. Forecasts can be carried out at a high level of aggregation—for example for GDP, inflation, unemployment or the fiscal deficit—or at a more disaggregated level, for ...
. Typically, using historical internal accounting and sales data, in addition to external industry data and
economic indicators An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic i ...
, a financial forecast will be the analyst's modeled prediction of company outcomes in financial terms over a given time period. (For
fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...
, analysts often also use
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
information, such as the 52-week high of stock prices to augment their analysis of stock prices. ) For the components / steps of business modeling here, see . Arguably, the key aspect of preparing a financial forecast is predicting revenue; future costs,
fixed Fixed may refer to: * ''Fixed'' (EP), EP by Nine Inch Nails * ''Fixed'', an upcoming 2D adult animated film directed by Genndy Tartakovsky * Fixed (typeface), a collection of monospace bitmap fonts that is distributed with the X Window System * F ...
and variable, as well as capital, can then be estimated as a function of sales via "common-sized analysis" - where relationships are derived from historical
financial ratios A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial ...
and other accounting relationships. At the same time, the resultant line items must talk to the business' operations:- in general, growth in revenue will require corresponding increases in
working capital Working capital (WC) is a financial metric which represents operating liquidity available to a business, organisation, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capital is consi ...
,
fixed asset A fixed asset, also known as long-lived assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that may not easily be converted into cash. Fixed assets are different from current assets, such as cash ...
s and associated financing; and in the long term, profitability (and other financial ratios) should tend to the industry average; see for more detailed discussion, and other considerations; also
Cash flow forecasting Cash flow forecasting is the process of obtaining an estimate or forecast of a company's future financial position; the cash flow forecast is typically based on anticipated payments and receivables. See Financial forecast for general discussion ...
. There is an extensive literature on the accuracy of analyst forecasts of revenue, profit and share price developments of companies. In general, this literature shows that analysts do not produce better forecasts than simple forecasting models Stotz, Andrew, An Empirical Study of Financial Analysts Earnings Forecast Accuracy (May 29, 2016). Available at SSRN: https://ssrn.com/abstract=2943146 or http://dx.doi.org/10.2139/ssrn.2943146


References

{{accounting-stub Budgets Forecasting Corporate finance Management accounting