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Modelling and Forecasting

This document discusses financial forecasting and modeling. It defines a financial forecast as estimating future income and expenses to plan a business's finances. Financial forecasts are useful for demonstrating viability, measuring performance, guiding direction, identifying risks, and securing funding. The document contrasts qualitative forecasting methods like opinions and surveys with quantitative methods using mathematical models and past data patterns. It also describes incremental budgeting by adjusting past budgets, and zero-based budgeting by justifying all expenditures without assumptions from prior budgets.

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Kafonyi John
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330 views

Modelling and Forecasting

This document discusses financial forecasting and modeling. It defines a financial forecast as estimating future income and expenses to plan a business's finances. Financial forecasts are useful for demonstrating viability, measuring performance, guiding direction, identifying risks, and securing funding. The document contrasts qualitative forecasting methods like opinions and surveys with quantitative methods using mathematical models and past data patterns. It also describes incremental budgeting by adjusting past budgets, and zero-based budgeting by justifying all expenditures without assumptions from prior budgets.

Uploaded by

Kafonyi John
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BAF 4209: FINANCIAL MODELLING AND FORECASTING

CAT 1

solutions

A financial forecast is simply a financial plan or budget for a business. It is an estimate of two
essential future financial outcomes for a business the projected income and expenses.

Usefulness of financial forecast:

Demonstrates the financial viability of a new business venture. Allowing you to construct
a model of how your business might perform financially if certain strategies, events and plans are
carried out
Allows you to measure the actual financial operation of the business against the forecast
financial plan and make adjustments where necessary
Allows you to guide your business in the right direction and take control of your cash
flow
Provides a benchmark against which to measure future performance
Identifies potential risks and cash shortfalls to keep the business out of financial trouble
Provides an estimate of future cash needs and whether additional private equity or
borrowing is necessary
Assists you to secure a bank loan or other funding, lenders and investors require financial
forecasts to show your capacity to repay the loan.

Compare and contrast qualitative versus quantitative financial forecasting methods.


Qualitative methods: These types of forecasting methods are based on judgments,
opinions, intuition, emotions, or personal experiences and are subjective in nature. They
do not rely on any rigorous mathematical computations. The qualitative methods used
include:
Executive opinion- Approach in which a group of managers meet and collectively
develop a forecast
Market survey- Approach that uses interviews and surveys to judge preferences of
customer and to assess demand
Sales force composite - Approach in which each salesperson estimates sales in his or her
region
Delphi method- Approach in which consensus agreement is reached among a group of
experts
Quantitative methods: These types of forecasting methods are based on mathematical
(quantitative) models, and are objective in nature. They rely heavily on mathematical
computations. Quantitative methods include
Time series
Time series models look at past patterns of data and attempt to predict the future based
upon the underlying patterns contained within those data
Associative models
Associative models (often called causal models) assume that the variable being
forecasted is related to other variables in the environment. They try to project based upon
those associations.

Two forms of budgeting.

Incremental budgeting
Involves taking last years figures and adding a bit on for inflation or whatever or even
taking a bit off due to perhaps downsizing
Zero based budgeting-with this form you begin with no preconceptions. It begins with the
assumption that the function
Zero-base budgeting
With zero based budgeting you begin with no preconceptions. In principal zero based
budgeting begins with assumptions that the function for which the budget is being
prepared does not exist. In practice however it is generally based on survival level of
expenditure as identified by the department manager. This is the bench mark .any
requested expenditure above this level must be justified

Question four

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