Business and financial forecasting is like looking through a telescope that has a thin layer of grease smeared on the lens but for business decision making it’s better than nothing and important.
Forecasting is important because, first, it forces the business to think about the future. It’s easy for business managers to be so focused on the present that they pay too little attention to what’s coming. Forecasting is a good discipline.
Second, it requires business managers to be aware of external and internal impacts on the business. To forecast well, business managers must be aware of their customers, competitors, suppliers, employees, the public and even politicians. They must be in touch with what’s going on and that has numerous benefits, strategically and operationally.
Third, forecasts are vital inputs to decision making. They allow the business to avoid difficulties, take advantage of opportunities and produce better business plans.
However, forecasts are what the business thinks at a point in time and as the world inevitably changes, so that thinking changes. So, forecasts must be updated regularly – monthly, quarterly, as necessary.
No matter how greasy your telescope lens, forecasting is a good thing to do.
Of course, to really understand financial forecasts you must understand financial statements…