CHAPTER 10Projections and Forecasts – Living, Rolling, and Breathing
THE IMPORTANCE OF BUSINESS FORECAST MODELS
In Chapter 13, we introduce you to the importance and concept of business planning, and its role in determining how to capitalize a business. The planning process includes numerous elements ranging from assessing current market conditions to understanding the macroeconomic environment to evaluating personnel resources to preparing budgets, forecasts, and/or projections. This chapter focuses on one of the most critical elements of the planning process – preparing a forecast. For the balance of this chapter, the term forecasts will be used for consistency purposes, but it should be noted that businesses often utilize other terms, including budgets or budgeting, projections, and proformas (which basically all mean the same thing). We prefer to use the term forecasts as it is broader in scope and helps drive home a key concept related to building top‐down forecast models (which we cover in this chapter).
Before we delve too deeply into the forecasting process, we make a quick attempt to properly define a forecast. Forecasts are not based on the concept of “How much can I spend in my division this year?” Rather, forecasts are more comprehensive in nature and are designed to capture all relevant and critical financial data, including revenue levels, costs of sales, operating expenses, fixed asset expenditures, capital requirements, and the like. All too often, forecasts ...
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