TABLE OF CONTENTS Forecasts are the financial documents that update the operating budget. Whereas the operating budget is a permanent financial plan for a year, the forecast is flexible and provides a way to makes changes to the budget to reflect current trends and economic/market conditions. Budgets are generally prepared in the fourth quarter of the current year for the next year. The budget for the first quarter is current, being only a couple of months old. However, the budgets for the third and fourth quarters are more than eight months old and many changes may have occurred in the marketplace that would affect the budget and the operations of a business. Forecasts are therefore valuable management tools used to update the budget so that it reflects current business levels and conditions.
Forecasting is not an exact science, and forecasts are not expected to balance or tie into other financial numbers. Forecasting involves using current information and combining this information with established ratios and formulas to estimate or project future business levels and operations. These ratios are based on existing relationships between revenues and expenses. These ratios can be applied aggressively or conservatively depending on the current management strategy.
There is a logical progression for the preparation of financial documents used as management tools in operating a business. Two aspects are involved. The first is historical in nature, and the second is forward looking and looks to the future.
All financial documents used in...
