Technique adopted while doing
financial forecasting:
Financial
forecasting aims ate predetermining the demand for funds and the avenues where
the funds are to be utilized. Thus a systematic projection of the financial
data is made in the form of financial statement (fund flow analysis, financial
ratio ext). Financial forecasting generates information which is utilized by
the management of an enterprise for taking decision s particularly for judging
the financial efficiency of the funds and projecting a scale of standards to be
followed in the future course. Another important basic objective of financial
forecasting is its use as control device. Optimum utilization of funds, by a
company can be planned through financial forecasting. Financial forecasting is
done by using the following technique
a) Fund flow analysis
b) Pro forma financial
statements
c) Cash budget
Fund Flow
Analysis: Fund flow analysis is accomplished by preparing a fund flow
statement for evaluating the uses of funds and determining the sources of funds
to finance those users. Fund flow analysis is done by studying past fund flows
and projecting future fund flows. Fund flow statement provides the management
of a corporate enterprise complete firsthand knowledge of the financial growth
of the enterprise and its resulting financial needs. As a matter of fact funds
flow statement is known as the best way to determine as to how to finance those
needs. It is useful foot in planning needs.
Pro Forma
Financial Statement: preparation of pro forma
financial statement is another technique for financial forecasting. In pro
forma financial statement, the pro forma balance sheet and profit and loss
account are prepared to enable the management to evaluate the performance of
the enterprise future financial conditions.
Cash Budget: cash budget is another technique of financial forecasting. It is
used to determine short-term cash needs. The liquidity position of an
enterprise and degree of business risk involved for planning a realistic margin
of safety. It gives clues of the enterprise for adjusting the liquidity
cushion, rearranging maturity structure of the debt and making arrangement for
availing cash credit facilities from the banks.
Problems in
Financial Forecasting:
1) Business environment is frequently changing. Every change
reflects upon uncertainty of future and enhances the degree of incompatibility
of present decision in future. Therefore the likely margin of error inherent in
forecasting the future should be considers in advance avoiding disappointment
caused by false results and the loss to be incurred due to inaccuracy attached
to the forecast.
2) Pre testing under controlled conditions of forecast
should be done by designing alternative forecast for making a better choice and
flexibility in decision making by allowing a pick up one out of several
forecast.
3) Continuous modification should be made in forecasting to
adjust the same against changes in business environment. Many experts hold that
forecasting to adjust ed to changes in sales volumes inventory levels, balance
of debtors affected by seasonal parameters.
4) to make the forecast reliable and also as a precautionary
measure to unpredictability of forecasting results, the corporate enterprise is
advised by experts to maintain sufficient cash balance to minimize the risk
involved in higher degree of unpredictability associated with forecasting
liquidity.
5) Use of mathematical technique can make the forecast more
reliable and dependable. These techniques may include a) Simple linear
regression method
6) Simple curvilinear regression method
7) Multiple regression models.
