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Financial Forecasts in Predicting Future Performance - Essay Example

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The objective of this essay “Financial Forecasts in Predicting Future Performance” is to validate the hypothesis that corporations are better-off eliminating financial forecasts as a tool to predict financial performance on the information that you have today…
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Financial Forecasts in Predicting Future Performance
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Download file to see previous pages To arrive at a conclusive argument, the following issues would be discussed: (1) uses of financial forecasts; (2) importance of forecasts; (3) kinds and approaches to financial forecasting; (3) factors that increase their reliability; and (5) find out if corporations still utilize this tool in their decision-making process.
Financial forecasts “are estimates of financial results based on the information that you have today” (Sponsored Research Funding). In a study conducted by Terner (2006), financial forecasts are simply defined as “an estimate or projection of costs or revenues”. From these two sources, it can be deduced that financial forecasts are merely estimates of financial components in a corporations’ financial statements. Forecasting utilizes historical data to predict future financial patterns.
Financial dictionary (2008) defines financial forecasts as a financial plan “that describes your current financial status, your financial goals and when you want to achieve them and strategies to meet those goals”.
There are different kinds of financial forecasts depending on the scale of the business, products offered or manufactured, funds requirements, and future business plans (expansion, diversification, etc.). According to Lane (2007), “the principal driver of the forecasting process is generally the sales forecast”. The rationale for this is that most items contained in the Balance Sheet and Income Statements are derived from the sales figures.
Percentage of Sales Method is a “financial forecasting approach which is based on the premise that most Balance Sheet and Income Statement Accounts vary with sales” (Lane 2007). The assumption here is that most items in those two financial statements have a direct percentage of sales, therefore, future financial performance is projected using the forecasted sales level. ...Download file to see next pagesRead More
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