Financial forecasting is the practice of projecting the quantitative impact of trends and changes in the operating environment on future operations. It is an integral part of all ongoing planning efforts. Financial forecasting is important for several reasons such as the following:
Although financial forecasting should be a continuing process, it is most important as a component of budget development. Forecasts of projected enrollments, property tax base and revenues, costs associated with salary adjustments, and so on, are important elements in setting baseline budgetary guidelines and creating the basis for the assumptions used to prepare budgets. Additionally, forecasting provides fiscal impact analysis that may be integrated into the budget development process. When this is done, current budgetary decisions may be evaluated for their long-term results.
Several action steps may increase the reliability of forecasts, if taken before forecasts are prepared. These steps include the following:
A variety of financial and related forecasts or projections are necessary for the preparation of a comprehensive budget, including:
The cash forecast is critical to ensuring that a fiscal crisis, such as a failure to meet financial obligations, will not result from a cash shortage. An accurate forecast indicates potential cash shortages and thus provides an opportunity for preemptive corrective actions to be taken. It also benefits the investment program by allowing the extension of maturities of investments. Longer investment maturities typically result in higher interest earnings. Projections of operating cash needs should be developed for the fiscal year on a monthly or biweekly basis, depending on the payroll cycle, and should consider the timing of federal and state aid payments, local property tax levies and collections, lunchroom sales, sales taxes, and interest earnings and disbursements. This type of cash flow analysis will reveal the short-term borrowing necessary to address anticipated shortages. The associated cost of short-term borrowing should be included as a budgeted expenditure in the fiscal period in which the interest is scheduled for payment.
Cash forecasting is also necessary for activities or programs that extend to multiple operating periods, such as major facilities construction and acquisition. Capital projects are typically financed from proceeds of bonds, loans, certificates of participation, or other long-term debt instruments. Cash projections for the period of activity should incorporate funding proceeds and related capital expenditures based on contractual arrangements with regard to the timing of cash flows.
Fund balance forecasting for governmental funds results from the budget development process. Periodic monitoring of balances is provided through integration of the budget and the accounting system and is necessary to ensure compliance with statutory and contractual fund balance requirements.