The Thoughtful Forecaster A Summary Submitted to Dr. Roy Patin, Professor of Finance Submitted by Faye d’Hamecourt In Partial Fulfillment of the Requirements for Financial Administration FINC 5713-70 Midwestern State University Dillard College of Business Administration Fall 2011 Date Submitted August 31, 2011 Forecasting is an important aspect in today’s business world. Every day businesses strive or lose, depending on the successfulness and accurateness of their forecasting. For successful forecasting, the forecaster needs to have a clear understanding of the current business activities, past trends, and the company’s business strategy.
Case 5 exhibits key principles on the way financial forecasting is done. Understanding the Financial Relationships of the Business Enterprise Forecasters use current information to predict the future business activities of the company. This information is found on the financial statements of the company. For example, the balance sheet provides a snapshot of the business’ assets, liabilities and equity at a specific point in time, whereas the incomes statement provides a view of the flow of costs during a specific time frame.
Financial ratios measure the relationships between various items on the financial statements. By comparing various ratios with those of previous years, trends can be identified. Because many financial ratios tend to be perserved over time, these ratios are very valuable for the forcaster. The forecaster can estimate only one financial statement line item and, by applying this number to the various ratios, he can make a complete forecast. Grounding Business Forecasts in the Reality of the Industry and Macroenvironment
An accurate forecast is made by recognizing not only internal data, but also external data. The environment a business operates in has a great impact on the future state of any business. A good forecast is made on the basis of economy and industry conditions. As an example, in most business fields in the United States, competition is a key factor of industry conditions. Economy conditions includes trends in macroeconomic situations and circumstances in the country.
Modeling a Base-Case Forecast That Incorporates Expectations for Business Strategy Once the forecaster contains a complete analysis of financial statement trends and environment conditions, the forecaster can the combine these into the business’ operating strategy to from a complete and proper forecast. The forecaster should also identify actions, coincidental with the business’ operating strategy for achieving these future business outcomes. Recognizing the Potential for Cognitive Bias in the Forecasting Process Research has indicated that financial forecasts made by humans is often systematically biased. Two