Sequel to my post about financila planning some few days ago, i decided to write about the financial forecasting as a prereuisite to financial planning
In creating a financial plan for your personal finances, family or even business, there are certain prerequisites that must be met to be able to adequately create a 90-95% fail safe financial plan as there is always room for the unforeseen circumstances. This process is simply called the Financial forecasting model.
Financial forecasting in itself is a combination of two weighty words
The first is finance and the second is Forecasting.
Finance: it is a word that has multiple meanings. It can be defined as the management of large amounts of money, especially by governments or large companies as well as monetary support for an enterprise. it is also defined as the monetary resources and affairs of a state, organization, or person. The latter succintly describes finance in this context.
Forecasting: to simply put, it is defined as the process or the act of predicting and occurrence in the future.
Marying the two concepts together gives us financial forecast which simply means predicting the future of tour finances.
investopedia defined financial forecasting as an estimation, or projection, of likely future income or revenue and expenses, while a financial plan lays out the necessary steps to generate future income and cover future expenses. Alternatively, a financial plan can be looked at as what an individual or company plans to do with income or revenue received.
While both processes orient financial activity toward the future, a financial plan is a road-map drafted now that can be followed over time and a financial forecast is a projection or estimate of future outcomes predicted today.
Forecasting is determining what is going to happen in the future by analyzing what happened in the past and what is happening now. It’s a planning tool that helps businesses adapt to uncertainty based on predicted demand for goods or services.
With this being said the importance of financial forecasting cannot be over emphasized in creating a proper financial plan.
You must be able to envision what your income and expenditure would look like over a period of time. This would allow you create a financial plan that’d be adequate with less errors.
For an individual, a financial forecast is an estimate of his income and expenses over a period of time. Based on that forecast, the individual can then construct a financial plan that includes saving, investing, or planning for obtaining additional income to augment his personal finances—as well as anticipating expenditures that would deplete them.
For businesses, its a different ball game entirely. It takes a whole lot of efforts in research, consultation and due diligence because their financial forecast ultimately affects their financial plans and the actualization of same.
Financial forecasts are an essential part of budgeting and funding — they simply help Individuals make better choices.
It informs major financial decisions, such as whether to Invest, when to spend or acquire assets, expand your capacity or seek loans.
A financial forecast Allows individuals have financial goals that are both realistic and feasible.