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Financial Forecasting Vs Budgeting

Financial forecasting involves a company determining expectations for future results, such as forecasting sales. Financial modeling takes the forecasts and builds a mathematical model using the company's financial statements to calculate the financial impact of the forecasts and help make business decisions. Financial forecasting provides goals and priorities while financial modeling calculates the numbers; both are used for budgeting, investment research, project financing, and raising capital.

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91 views

Financial Forecasting Vs Budgeting

Financial forecasting involves a company determining expectations for future results, such as forecasting sales. Financial modeling takes the forecasts and builds a mathematical model using the company's financial statements to calculate the financial impact of the forecasts and help make business decisions. Financial forecasting provides goals and priorities while financial modeling calculates the numbers; both are used for budgeting, investment research, project financing, and raising capital.

Uploaded by

Rohit Bajpai
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Forecasting vs.

Financial
Modelling: What's the Difference?
Financial Forecasting vs. Financial Modeling: An Overview
Financial forecasting is the process by which a company thinks about and
prepares for the future. Forecasting involves determining the expectations
of future results.

On the other hand, financial modeling is the act of taking a forecast's


assumptions and calculating the numbers using a company's financial
statements.

KEY TAKEAWAYS

 Financial forecasting is the process in which a company determines


the expectations of future results.
 Financial modeling takes the financial forecasts and builds
a predictive model that helps a company make sound business
decisions.
 Financial forecasting and modeling can be used in budgeting,
investment research, project financing, and raising capital.
Financial Forecasting
When a company conducts its financial forecasts, it seeks to provide the
means for the expression of its goals and priorities to ensure they are
internally consistent. Forecasts can also help a company identify the
assets or debt needed to achieve its goals and priorities.

A common example of a financial forecast is forecasting a company's


sales. Since most financial statement accounts are related to or tied to
sales, forecasting sales can help a company make other financial
decisions that support achieving its goals. However, if sales are to
increase, the resulting expenses to produce the additional sales would
also increase. Each forecast results in an impact on the company's overall
financial position.

Forecasting helps a company's executive management determine where


the company is headed. Calculating the financial impact of those forecasts
is where financial modeling comes into play.

Financial Modeling
Financial modeling is the process by which a company builds its financial
representation. The model created is used to make business decisions.
Financial models are the mathematical models made by a company in
which variables are linked together.

The modeling process involves creating a summary of a company's


financial information in the form of an Excel spreadsheet. The model can
help determine the impact of a management decision or a future event.
The spreadsheet also allows the company to modify the variables to see
how the changes could affect the business.

As a result of an expected to increase in sales, for example, a company


must also forecast the resulting increase in raw material or inventory costs.
If the company needs a new piece of equipment, the cost to purchase or
lease must be estimated. Credit needs could also be forecasted based on
the sales and the resulting expenses to produce the sales. A company
might need to increase their working capital credit line with a bank, for
example.

Forecasts are helpful, but at some point, the number-crunching must be


done via a financial model. The modeling calculates the financial impact
that a forecasted increase in sales has on the company's income
statement, balance sheet, and cash flow statement.

Financial models are used for several reasons, including:

 Historical analysis of a company


 Projecting and budgeting the financial performance of a company
 Investment research, such as equity analysis
 Project finance analysis, which is the funding of long-term assets
and industrial projects
 Purchase of another company or merger
 Raise capital or funding
 Create pro forma financial statements, which are statements created
based on a company's assumptions and forecasts

Financial modeling takes the financial forecasts created during a


company's financial forecasting and builds a predictive model that helps a
company make sound business decisions based on its forecasts and
assumptions.

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