Management Forecasts in Finance
Management forecasts refer to predictions or projections about future business performance, particularly future sales, made by a company’s internal management. These forecasts are based on the manager’s experience, insights into the company’s products, market trends, customer behaviour, and competitive landscape.
In addition to market surveys, the company’s managers may be able to provide forecasts of future sales. The experience of a company’s management and their familiarity with the company’s products, customers, and competitors make them reliable forecasters of future sales.
The company’s own managers should have the expertise to predict the market for the goods and services and to evaluate the costs of producing and marketing them. But there are potential problems in using management forecasts. Consider the case of a manager who forecasts rosy outcomes for a new product.
These forecasts may persuade the company to allocate more resources-such as a larger capital budget and additional personnel-to that manager. If these forecasts come true, the company will be glad these additional resources were allocated. But if these forecasts turned out to be too rosy, the company has unnecessarily allocated these resources.
Forecasting is an important element in planning for both the short and the long term. But forecasts are made by people. Forecasters tend to be optimistic, which usually results in rosier-than-deserved forecasts of future sales.
In addition, people tend to focus on what worked in the past, so past successes carry more weight in developing forecasts than an analysis of the future. One way to avoid this is to make managers responsible for their forecasts, rewarding accurate forecasts and penalizing managers for being way off the mark.
