What is financial forecasting?

Financial forecasting is the practice of estimating future financial outcomes based on historical data, trends, and various assumptions about future economic conditions. This process is essential for organizations as it helps in making informed decisions regarding budgeting, investment, and overall strategic planning. By analyzing past financial performance and considering variables such as market conditions, interest rates, and sales projections, businesses can create reliable forecasts that guide their financial strategies.

This approach allows companies to anticipate potential challenges and opportunities, enabling them to allocate resources effectively and maximize their financial performance. Properly done, financial forecasting can lead to better cash flow management, improved financial stability, and increased profitability.

While producing financial statements, calculating past performance, and making adjustments to records are related activities within financial management, they do not encompass the forward-looking aspect that defines financial forecasting.