1) With many analysts saying we are in or about to be in a recession, what approach is best to forecast next year’s results?
2)Financial analysis is often backward looking, relying on past results to look for performance and trends. The information is based on actual results and if appropriately compiled, is an unbiased and factual set of data. These reports are often reviewed by independent financial auditors and subject to substantial controls to increase quality and accuracy.
There are many needs to have forward looking forecasts for financial information. One example is to forecast cash flows and working capital needs and to make decisions on how to allocate resources. Often these forecasts rely on past trends as the basis for forecasts, but this can be limited.
Forecasted financial statements require assumptions which are both internally and externally focused. Internally, there are forecasts such as new product developments, staffing requirements, restructuring plan implementation and marketing assumptions. External assumptions can be difficult to be accurate. As we have seen the past few years, factors such as a pandemic, inflation, political changes and war may change inputs and demand for a companys products/services.
Forecasts can be significantly altered by assumptions. This leads to the possibility of biases such as overly-optimistic or pessimistic views, as well as manipulation by the creators of the forecasts.
The most common forecasts are budgets, usually for the coming year. As CFO for multiple organizations, I presented annual budgets to boards of directors to approve. I included a focus on key assumptions and risks to provide transparency on decision making. As budgeting is a process, I found that many assumptions were already challenged by the time the budgets were approved. Utilizing assumptions and risks provides a means to discuss deviations which usually occur.
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