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Financial Forecasting Models

What is Financial Forecasting?

Financial Forecasting is an activity involving the processing, estimating, or predicting of the future financial performance of a business. It is a key tool for decision making for entrepreneurs and CEOs, for example through predicting sales, other revenue streams, variable and fixed costs, and capital. These help estimate and predict the future financial position of the business, enabling better decision making.

Financial Forecasting also helps with setting objectives and budgets, as well as persuading investors and shareholders to invest.

There are 3 important statements when making financial decisions:

-Income statement

-Cash flow statement

-Pro-forma balance sheet

Types of Financial Forecasting

There are two types of forecasting: quantitative and qualitative.

Quantitative forecasts use past historical data to find patterns to help predict future trends. As they are based on data, quantitative forecasts are less likely to be biased or unreliable than qualitative forecasts. However, if there isn’t much historical data available, this method becomes less reliable so quantitative and qualitative methods are often used together.

Examples of quantitative forecasting - -Cause-effect method - -Pro-forma financial statements - -Time series analysis

Qualitative forecasting uses expert judgments and estimates, relying on the opinions, knowledge and experience of financial forecasters and consultants to predict future values and see connections that sometimes computers miss. However, people are likely to have biases and reduce the reliability of the findings, so again these two types of financial forecasting are often used together.

Examples of qualitative forecasting - -Expert opinions - -Consumer research - -Reference forecasts

Want to learn more?

Financial Forecasting Guide

What is Financial Forecasting?

Budgeting vs. Financial Forecasting: What's the Difference?

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