# Financial forecast

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A **financial forecast** is an estimate of future financial outcomes for a [company](/source/Company) or [project](/source/Corporate_finance#Investment_and_project_valuation), usually applied in [corporate budgeting](/source/Corporate_budget), [capital budgeting](/source/Capital_budgeting) and/or [valuation](/source/Valuation_(finance)). Depending on context, the term may also refer to a listed company's (quarterly) [earnings guidance](/source/Earnings_guidance).

For a country or [economy](/source/Economy), see [Economic forecast](/source/Economic_forecast).

Typically, using historical internal accounting and sales data, in addition to external [industry data](/source/Market_(economics)#Types_of_markets) and [economic indicators](/source/Economic_indicators), a financial forecast represents the analyst's [modeled prediction of company outcomes](/source/Financial_modeling#Accounting) in financial terms over a given time period.

For the components and steps of business modeling, see [Outline of finance#Financial modeling](/source/Outline_of_finance#Financial_modeling).

Arguably, the key aspect of preparing a financial forecast is [predicting revenue](/source/Revenue_management#Forecasting); future costs, [fixed](/source/Fixed_costs) and [variable](/source/Variable_costs), as well as capital, can then be estimated as a function of sales via ["common-sized analysis"](/source/Financial_analysis#Method)—where relationships are derived from historical [financial ratios](/source/Financial_ratios) and other accounting relationships.[1]

At the same time, the resultant line items must align with the business's operations: in general, growth in revenue will require corresponding increases in [working capital](/source/Working_capital), [fixed assets](/source/Fixed_asset) (see [owner earnings](/source/Owner_earnings)) and associated financing; and in the long term, profitability (and other financial ratios) should tend to the industry average. See [Valuation using discounted cash flows #Determine cash flow for each forecast period](/source/Valuation_using_discounted_cash_flows#Determine_cash_flow_for_each_forecast_period) for a more detailed discussion and other considerations; also [Cash flow forecasting](/source/Cash_flow_forecasting).

There is an extensive literature on the accuracy of [analyst forecasts](/source/Securities_research) of revenue, profit, and [share price developments](/source/Share_price#Behaviour_of_share_prices) of companies. In general, this literature shows that [analysts](/source/Financial_analyst#Securities_firms) do not produce better forecasts than simple forecasting models.[2][3]

(In addition to the above outline, for financial forecasts, analysts often also use specific historical financial information, such as the 52-week high of stock prices, to augment their analysis of stock prices.[4])

## References

1. ["Research • AIBD Unica"](https://aibd.unica.it/research). *aibd.unica.it*. Retrieved 2023-05-10.

1. Hein Schreuder and Jan Klaassen (1984), Confidential Revenue and Profit Forecasts by Management and Financial Analysts: Evidence from The Netherlands, The Accounting Review, vol. 59, no. 1, January 1984)

1. Stotz, Andrew, An Empirical Study of Financial Analysts Earnings Forecast Accuracy (May 29, 2016). Available at SSRN: [https://ssrn.com/abstract=2943146](https://ssrn.com/abstract=2943146) or [http://dx.doi.org/10.2139/ssrn.2943146](http://dx.doi.org/10.2139/ssrn.2943146)

1. Low, R.K.Y. & Tan, E. (2016). ["The Role of Analysts' Forecasts in the Momentum Effect"](https://espace.library.uq.edu.au/view/UQ:406166/UQ406166_OA.pdf). *International Review of Financial Analysis*. **48**: 67–84. [doi:10.1016/j.irfa.2016.09.007](https://doi.org/10.1016/j.irfa.2016.09.007)

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