Difference between Financial Forecasting and Financial Modelling

Financial Forecasting

Financial forecasting is defined as the process by which any company thinks about and prepares for its future. Forecasting involves the process of determining the expectations for future results. When any company decides to conduct its financial forecasts, it then seeks to provide a means for the expression of its priorities to ensure that they are consistent internally. The forecasts can also help the company identify any assets or debt that is needed to achieve the goals and priorities of the organisation.

A common example of a financial forecast is the forecasting of the sales of a company. Since most of the financial statements are related to sales or forecasting, it can help the company make any other financial decisions that will support in achieving the goals of an organisation. However, if the sales increase, then the resulting expenses that will help to produce additional sales will also increase. Each of the forecasts also results in an impact on the overall financial position of a company.

One of the main advantages of forecasting is that it helps the management determine where the company is headed.

Financial Modeling

Financial modelling is defined as the process of forecasting and calculating the numbers using the financial statements of a firm. The process of financial modelling helps an organisation to build its financial representation in the market. This model that has been created is used solely for the purpose of making business-related decisions. The financial models made by a company have a set of variables that are linked together. The modelling process involves the process of creating a summary of the financial information of a company, and it can help to ascertain the overall impact of a management decision on future events. The spreadsheet also helps the company to make changes in the variables to help see how they end up affecting the business. The forecasts are also very helpful for the management to make decisions. But the number-crunching must also be done with the help of a financial model. It helps to calculate the overall financial impact that any forecasted increase in sales has on the balance sheet, income statement and cash flow statement of any company.

Difference between Financial Forecasting and Financial Modelling

Both financial forecasting and financial modelling have a huge impact on the strategies of a company, and it influences their future decisions as well. However, there are a number of areas of difference between financial forecasting and financial modelling, which we will delve in to get a better understanding of these concepts:

Financial Forecasting

Financial Modelling

Definition

Financial forecasting is defined as the process by which an organisation thinks about and also prepares for the future.

Financial modelling is defined as the process of forecasting and calculating the numbers using the financial statements of a firm.

Audience

Financial forecasting appears on the income and cash flow statements of a company apart from their balance sheets as well.

The financial modelling is done for the internal decision-making process, and they are not necessarily shared with the investors or the creditors.

Data Inputs

Financial forecasts are also built on historical and forward-looking data to help provide the expected revenue and expenses for the upcoming accounting period.

The financial modelling helps to use the forecasts and other data as well to make a simulation of the impact of specific decisions on the business performance.

People

The operations and financial planning teams help to create the forecasts to report the planned expenses and revenues. These numbers help to guide the decision-makers.

The skilled workforce can help to create models for many reasons that range from revising forecasts to performing research.

Conclusion

There are a number of points of difference between financial forecasting and financial modelling. But both of them perform a very critical role in the functioning of any organisation. These instruments are also crucial in the overall development and growth of the economy of our country.

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