Chapter 3: Budgeting — Financial Forecasting and Planning

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:

• It facilitates planning efforts by quantifying the future costs and benefits of strategic decisions. Thus, budgetary priorities may be evaluated on the basis of their long-term impacts.
• It clarifies trends, needs, and issues that must be addressed and evaluated in the preparation of budgets. For example, enrollment forecasting may reveal growing student populations and focus attention on the need for increased resource allocations for staff, facilities, or both.
• It enhances decisionmaking at all levels of administration, provides valuable insight into future issues (which allows administrators to be proactive), and creates the framework for anticipatory management.

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. Such analyses allow current budgetary decisions to be evaluated for their long-term results.

According to Miller and McClure (1988), the reliability of forecasts can be increased by taking several action steps in advance of their preparation. These steps are as follows:

• Clarify the intended purpose of the forecast. The prospective audience may require a certain set of data and related assumptions.
• Match the time frame with the purpose of the forecast. Time frames for forecasts will vary according to the purpose (i.e., type) of the forecast being prepared.
• Ensure the accuracy of basic data. Original source data should be used rather than extrapolated or summarized data. Sources should be documented and verified so that any concerns about data validity can be allayed.
• Specify the underlying assumptions. Assumptions in the forecasts should be explicit, with proper documentation based on actual data.
• Be consistent in calculations. Spreadsheet programs are recommended for preparing forecasts to ensure the accuracy and consistency of calculations.
• Examine data critically. A scan of the data may reveal anomalies or errors that can adversely affect forecasts. A comparison of initial values and forecasted values should be completed to ensure the reasonableness of forecasted values.
• Recognize that forecasting requires insight and intuition. Some variables or forecasting assumptions will always be a best guess. However, experience provides a basis for this type of estimation.

A variety of financial and related forecasts are necessary for the preparation of a comprehensive budget. These include forecasts for student enrollment, revenues and expenditures, assessed property value, debt service costs, cash flow, and fund balance.

Cash forecasts and fund balance forecasts are discussed below.

Cash Forecasts

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 the 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 Forecasts

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.

Top