What is a forecast?
An updated projection of where the numbers are actually heading. It uses closed actuals and a current outlook, not last winter's locked plan.
Definition
A forecast is a current view of where the numbers are heading from here. It takes what has already happened and a present outlook, then projects the rest of the period.
On the books, it is not an account. Actuals still post to the general ledger; this view sits beside them as a forward picture.
The approved plan can stay frozen for the year. This view moves when the story changes.
Where it shows up
P&L: Related to the updated projection of income and expense.
Balance sheet: Related to the updated projection of assets, liabilities, and equity when those are forecasted.
Cash flow: Related to the updated projection of cash when a cash forecast is included.
See also: Budget · Rolling Forecast · Budget Versus Actual
When you look at your Income Statement, this view is the updated path for revenue and expense, not last winter's locked plan. You read it next to actuals so far.
The Balance Sheet can have the same treatment when cash, receivables, and payables are projected too. Many small shops start with income and expense and add balances later.
Cash is included only if you also project receipts and payments. Building an income view does not, by itself, move the bank account.
Owners usually keep this in a spreadsheet or a planning workbook. The live books stay the record of what already posted.
How it works
Start with actuals that have already closed. Then project the months that are still ahead, using what you know now.
May sales that came in above the locked plan change June's picture. You do not wait for next year's planning cycle to admit the new path.
The update can cover:
Some shops also push the same view into cash and balance-sheet lines.
The updated projection is the work here. The locked plan is a different document, and stretching the horizon as months pass is a different mechanic.
When the next month closes, those actuals replace the projected cells for that month. The remaining months get another look.
This view is a management tool, not a journal entry. Nothing in the general ledger changes just because you revised June.
If the outlook worsens, the remaining months come down. If it improves, they come up.
Example
A pizza shop locked $16,000 of June sales in last winter's plan. May actuals came in at $18,000, and the owner can see the extra weekend traffic holding.
June is now projected at $19,000. The locked $16,000 stays on the plan; the current view is the $19,000.
The shop still posts real June sales to revenue as tickets ring. The $19,000 is the heading, not a book entry.
If a street closure then cuts walk-in traffic, the owner can pull June back down. The point is to keep the heading current.
When June closes at $18,400, that actual replaces the $19,000 cell. July and August get a fresh look from there.
The Financial Statement Package still shows the books. The projection lives in the planning file beside them.
Common mix-ups
A forecast is not the same as the approved spending plan. The plan is what you meant to do; this view is where the numbers are actually heading.
A forecast is not the same as always keeping a fixed number of months out in front. That horizon mechanic is a way of maintaining a projection, not the projection itself.
A forecast is not the same as variance analysis. Variance work explains why two sets of numbers differed after the fact; this view looks forward.
Related terms
- Budget: The approved plan of revenue and spending for a coming period.
- Rolling Forecast: A forecast that always extends the same number of periods ahead as time passes.
- Budget Versus Actual: The comparison of planned amounts to what actually happened.
- Cash Flow Forecast: A forward projection of cash receipts and payments.
- Driver-Based Forecasting: Building projections from the underlying volume and rate assumptions.
- Scenario Planning: Modeling several plausible futures to see how the numbers hold up.
- Run Rate: Annualizing a recent period's results as a rough forward estimate.
- Variance Analysis: Investigating and explaining differences between two sets of numbers.