Finance and Accounting for Nonfinancial Managers: All the Basics You Need to Know

By William G. Droms | Go to book overview

7
Financial Forecasting
and Cash Budgeting

OBJECTIVES OF FINANCIAL FORECASTING

Adequate financial planning is a key element in the success of any business venture. Conversely, the lack of adequate financial planning is often a key element in the failure of many business enterprises. In this chapter, we will examine commonly used techniques for both short-term and long-term financial forecasting and budgeting. The objectives for both short-term and long-term planning are the same, and the techniques employed differ primarily in the degree of detail developed in the analysis. Both types of planning have as their overriding objective the development of a financial planning and control system to guide the financial future of the firm. Short-term forecasts tend to focus closely on cash budgeting and cash flow planning, while long-term forecasts tend to focus more on planning for future growth in sales and assets and for the financing of this growth.


SHORT-TERM FORECASTS AND CASH BUDGETING

A short-term forecast and cash budget is simply a plan for the near future expressed in monetary terms. The objective of this plan is to provide a planning and control system to guide the next few months or quarters of the company's operations. Emphasis is placed on the word control to highlight the key role of the financial plan in guiding a company's fiscal course. It is obviously unreasonable to expect a monthly budget to be 100 percent accurate over a planning period of six to twelve months. This, of course, is not the intent of the budget. The

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