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As a division manager at Abel Athletics, you are expected to work with the Finance Department to develop financial forecasts for your division. Prepare a document that explains why forecasting is important to an organization.
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Questions:
- Explain the forecasting process, compare, and contrast it to the budgeting process.
- Discuss the role of projected or forecasted (pro forma) financial statements in the budgeting process.
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Solution Preview
Let’s take a closer look at the two questions individually, which can help you in preparing your final document.
RESPONSE:
- Prepare a document that explains why forecasting is important to an organization. Explain the forecasting process, compare, and contrast it to the budgeting process. Discuss the role of projected or forecasted (pro forma) financial statements in the budgeting process.
The budgeting process and forecasting process have some general similarities. For example:
? Both involve techniques for predicting or “anticipating financial needs and changes in the company’s immediate future.”
? Additionally, both tools use “previous information to create conclusions and powerful analysis”.
? Because predictions about the future, such as sales change on a daily basis, is difficult. “Therefore, one important similarity is the uncertainty within both of these concepts and the understanding that there will always be blind spots within the reporting.”
? Furthermore, both tools are “indispensable as they focus on the value of production, expansion, and growth” (Gitman, 2006, cited in http://www.associatedcontent.com/article/1472951/capital_budgeting_vs_forecasting_pg3.html?cat=3).
There are also several differences. For example:
? Budgeting “is a decision making process that can be used for capital venture or rejected for any number of reasons.”
? Forecasting, on the other hand, “is simply an …
