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A financial forecast is an estimate of future financial outcomes for a company or project, usually applied in budgeting, capital budgeting and / or valuation; see Financial modeling #Accounting. Depending on context the term may also refer to listed company (quarterly) earnings guidance. For a country or economy, see Economic forecast.
Typically, using historical internal accounting and sales data, in addition to external industry data and economic indicators, a financial forecast will be the analyst's modeled prediction of company outcomes in financial terms over a given time period. (For fundamental analysis, analysts often also use stock market information, such as the 52-week high of stock prices to augment their analysis of stock prices. ) For the components / steps of business modeling here, see the list for "Equity valuation" under Outline of finance #Discounted cash flow valuation.
Arguably, the key aspect of preparing a financial forecast is predicting revenue; future costs, fixed and variable, as well as capital, can then be estimated as a function of sales via "common-sized analysis" - where relationships are derived from historical financial ratios and other accounting relationships. At the same time, the resultant line items must talk to the business' operations:- in general, growth in revenue will require corresponding increases in working capital, fixed assets 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 for more detailed discussion, and other considerations.
- Low, R.K.Y.; Tan, E. (2016). "The Role of Analysts' Forecasts in the Momentum Effect" (PDF). International Review of Financial Analysis. 48: 67–84. doi:10.1016/j.irfa.2016.09.007.
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