What Is "Forecasting" in Accounting?

Forecasting is a term used commonly in business strategy and planning. When businesses make decisions about operations, including revenue and production, they have to plan at least several years into the future. This requires anticipating movements in the market, the interests of consumers and the efficiency of the business itself, both currently and in the future. Creating strategy for long-term goals can require intense analysis, which is where forecasting and accounting become very important.

Essentially, forecasting is the process of predicting future numbers for the business. Many of these future numbers depend on business statistics from the past, so accountants typically perform much of the forecasting work in businesses. They use rates of return and rates of change in order to predict future figures as accurately as possible. This helps the business decide what projects to pursue and where to set goals. There are several specific areas where forecasting is used in budgets and similar financial statements.

When a business first plans a new project or another cycle of operations, one of the first questions it asks is how much the plans will cost. Costs are key, not only in total but also based on when they will occur during operations. The business must plan ways to finance projects in order to make them possible. So a key part of forecasting is moving through future projects step by step, carefully analyzing each piece and linking it to an accurate expense. The cost of producing goods and the costs associated with labor and marketing are all frequent calculations.

Businesses must also plan out their revenues to know how much money they will be bringing into the business. In some cases revenues are very easy to forecast, since they can depend on stable investments or markets where sales are assured, at least to an extent. But in other industries revenues can become difficult to forecast, and businesses use very tight budgets that require careful analysis of production and future sales. Accountants often use past numbers and trends in order to predict future revenue.

From a wider perspective, accountants must also forecast market movements and their effect on many different business factors, including costs and revenues. For instance, if interest rates are moving up in the economy, then forecasts must show increased costs for borrowing money but also increased returns on money lent. Inflation rates change the current value of future returns as well. New technology, global connections and many other changes can affect the expenses and incomes a business can expect.