Financial Forecasting

Financial Forecasting

The most common reasoning behind financial forecasting is predicting the future financial needs of the business. The most common form of financial forecasting is the application of a pro forma income statement, cash budget, and pro forma balance sheet (Block, et al, 2009, p. 95). Another form of financial forecasting is the use of the percent-of-sales method (Block, et al, 2009, p. 106). Forecasting of finances occurs in most businesses, from newly founded firms and family-owned business, to long-standing corporations. The main purpose of the forecasting remains the same through all levels; however, there are differing applications dependent upon the business at hand.

A company brand new to their market is likely going to need financial backing in the form of loans to assist in start-up. Providing lenders with a pro forma income statement, cash balance, and pro forma balance sheet to inform them of the company's projected financial forecast will allow the lenders to make an educated decision about the level of risk involved with lending funds to the company.

Family-owned businesses can also benefit from financial forecasting in the aspect of borrowing funds for expansion and operational purposes. In addition to this, they also can allow themselves to gain a snapshot of the direction of growth within the company and determine how profits will be allocated between involved family members. This can allow them