Financial Forecasting

Policy Overview

The success of a business depends in large part on the reliability of financial forecasting, which is the process of predicting an organization’s future financial performance.  Within UIS/OAS, original assumptions made in the previous Corporation Budgeting cycle, including, but not limited to, estimated sales volumes, capital requirements, staffing resource requirements, customer demands and vendor contracts, must all be verified and updated to reflect known changes and the most current information available.  Any change could have a significant financial impact on a business’ operating results, which may require management to take appropriate action prior to the end of the fiscal year.

Timing and Frequency of Forecasting Cycles

The first time forecasting is done during the fiscal year is in mid to late fall, to aid in the development of UIS Service Center rates for the following fiscal year.  In mid-March, UIS Service Center business units are required to formally submit a detailed current fiscal year end forecast along with the next fiscal year’s Corporation Budget to the University Budget Office (UBO).  Updated forecast figures are then compared to both the originally submitted current and next fiscal year’s Corporation Budgets; variances must be explained in detail.  While Core Funded units are not required to submit a year end forecast at this time, they usually go through the forecasting exercise as a means to produce the following year’s Corporation Budget.  Core units are, however, asked to submit a year end forecast to the UBO, usually in the spring.

Though it is not mandatory, local business units often choose to continue to reforecast on a monthly basis to maintain the most accurate, up to date financial picture possible for internal management use, including estimating the current year end and roll forward business unit operating balances.      

Forecasting Tools and Sources of Information

The most common tool used during the forecasting process is Microsoft Excel, although some groups within UIS/OAS also utilize the Cognos software application tool.  The information needed to complete a financial forecast is the same as what is needed to develop the Corporation Budget.  Sources of and tools for obtaining this information are listed and explained in detail in the UIS/OAS Budgeting Guidelines & Procedures.

Forecasting Methodologies

Financial forecasting is considered very business specific, taking into account how each business group operates as well as its individual internal and external business drivers/challenges.  From early in the fiscal year through year end, the process needs to be flexible and can change over time as information becomes available.  Consequently, there is no one single method used to create a business financial forecast.  Below are some of the most common techniques used today.

Current Year Budget

If there are no expected changes to a particular expense or revenue line item, then the forecasted amount remains the same as the original budgeted amount.  Whether the total amount is spent evenly throughout the year or spent all at once will make no difference in the end result.

Straight Line

The straight line method is used when month over month spending is considered to be fairly constant and predictable (e.g. telephone, space costs).  The year to date actual amount is divided by the number of months that have closed on the general ledger since the beginning of the fiscal year to get an average monthly spending amount.  This result is then multiplied by 12 to come up with the new annual forecast amount.

Year to Date Actual Plus Estimated Future Spending

All specific revenue or expense changes that are known at this time and that will affect any portion of the remainder of the fiscal year should be incorporated into the forecast.  Year to date actual spending amounts are added to the estimated future spending for the rest of the fiscal year.  For example, if a business leases equipment today and knows that new equipment will be added to the lease in January, then the total new lease payments for the second half of the year should be calculated and added to the total costs paid for the first half of the year to create the revised year end forecasted expense amount.

Historical/Prior Year Data

Prior year or other historical data is often used to track important trends and provide additional information used to help predict annual spending or sales.  For example, a business with seasonal sales (i.e. Technology Product Center) can track monthly sales figures year over year to develop a formula that determines total year end sales based on historical data indicating that a fixed percentage of total annual sales are usually achieved in the first half of the year.   If this percentage has been tracked for several years in a row, it can prove to be quite reliable.

Below is a table that illustrates an example of each methodology described above.

Examples of Financial Forecasting Methodologies

How to Interpret the Data

When the forecasting process is complete, there will be either a net positive or negative variance in relation to the original plan/budget.  The business director must then decide what action, if any, to take relative to these results.  For example, a considerable increase in the net operating deficit may require that certain expense line items be reduced or future spending be postponed, in order to achieve break even or a more positive financial outcome.  Significant variances in either direction should be explained in detail.

Communication of Results

Directors should understand and be able to communicate how budget variances are generated.  Results should be discussed periodically with your supervisor.  The Director of Finance will discuss the overall financial forecast results for all of UIS/OAS with the UIS Executive Director and CIO prior to final submission to the Budget Office. 

For More Information

For more information, visit see the University’s Fiscal Budgeting Policies or contact your Financial Partner.