Financial Forecasting Methods

Financial forecasting methods are used to predict the success of a company in the coming year. This method of forecasting is not only used for planning and budgeting, but may be a tool for outsiders to use when determining whether to invest in a company. Financial forecasting can also be used when determining predictions for currency markets of other countries. These methods can be used independently or together to give a more accurate prediction.

The Bayesian Method

The Bayesian Method is one of the many methods of financial forecasting used in corporate America. However, this method is far more dependent on belief than history, as other methods are based. It involves using a complex formula based upon the outcome of historical events to create forecast of future events. The formula also includes factors of probability in regards to stock indexes and interest rates decreasing or increasing. By taking into account both interest rates and stock indexes, one can make better financial forecast than just basing a theory off simplified guessing.

Reference Class Forecasting

Reference Class Forecasting is another method used in financial forecasting methods. This method involves forecasting or predicting the outcome of a planned action based on similar scenarios in other times or places. Reference class forecasting is used to counter predictions that are made based off simple human judgment. Forecasting methods using judgement have been known to be inaccurate because most judgment underestimates work and overestimates rewards of that work. Using similar scenarios that have already occurred provides a more factual basis of forecasting.

Proforma Financial Statements

Proforma Financial Statements is a forecasting method that uses sales figures and costs from the previous two to three years. This method of forecasting is typically used in situations such as mergers and acquisitions. It provides a good basis of the financial statements of a company while eliminating certain costs that are not reoccurring or not typical for the organization or company. The Proforma Financial Statements are also used in cases where a new company is forming and statements are needed to request capital from investors.

Budget Expense Method

The budget expense method bases its amounts for sales and company costs on the expected growth in the future. This method is not as dependable because it does require those within the company to make judgements without the basis of history. Typically, when the Proforma Financial Statements method is used, the budget expense method is used in conjunction with Proforma. These two forecasting methods were not created or meant to be used independent of each other. Using both methods together is called the Combination Method.

Financial forecasting can be difficult for businesses when based upon judgements or subjective opinions. However, using different forecasting methods with each other can yield results that are more substantial and accurate. Financial forecasting can assist companies and investors when first starting out or attempting to predict the success of fiscal performance in the coming year. In any case, financial forecasting aids those who are making decisions of investment.