Financial forecasting refers to determination of financial requirements of the firm in advance. This requires financial planning using budgets.
The financial planning and forecasting will also determined the activities the firm should undertake in order to achieve its financial targets.
Financial forecasting is important in the following ways:
1. Facilitate financial planning i.e determination of cash surplus or deficit that are likely to occur in future.
2. Facilitate control of expenditure. This will minimise wastage of financial resources in order to achieve financial targets.
3. It avoids surprise to the managers e.g any cash deficit is known well in advance thus the firm can plan for sources of short term funds such as bank drafts or short term loans.
4. Motivation to the employees – Financial forecasting using budgets and targets will enhance unity of purpose and objectives among employees who are determined to achieve the set target.