Financial Forecasting

Financial Forecasting

Some things that companies use financial forecasts for are usually when the company needs to obtain loans for the business or they could have plans to make their business grow. Financial forecasts in a new business are a necessity because the business can use them to plan its development, purchases, and payments during its first years of business. By preparing this information the company can properly budget and better understand when it can afford to hire employees or make equipment purchases. Also bankers will often need financial forecasts from new businesses to determine whether that particular business has any potential to repay loans.

A family owned company may need to obtain a financial forecast for several reasons other than just bank lending. Often, private companies are sold to other family members or other investors. Having a financial forecast can often help the owners of such companies obtain higher payment for ownership shares in their company or for the entire company itself. A well prepared financial forecast can have this effect because it can provide guidance as to what profits, assets, and liabilities are expected to be in the future. This helps potential investors or buyers evaluate the rate of return on their investment.

A long-standing corporation can use a financial forecast to determine whether it can expand or whether it should alter a current business practice. Business managers can use financial forecasts to help them foresee the financial future of the company by comparing them to current trends. The result of this gives them a chance to eliminate some poor business decisions before they happen and to help make good decisions based on their estimated results. (Block, Hirt, Danielsen, 2009)

References

Block, B.B., Hirt, G.A., & Danielsen, B.R. (2009). Foundations of financial management (13th ed.). New York, NY: McGraw Hill/Irwin.