Why the Financial Industry is Shifting to Financial Forecasting Models
With the unprecedented shifts in the global economy, financial advisors are transitioning to financial forecasting models.
Financial forecasting is a process detailing the economic vision for the future of any company. In other words, it usually involves forecasting the expectations of future results. In contrast, financial modeling consists of taking these assumptions and calculating the effect of a specific future decision.
Financial modeling stimulates distinct scenarios for analyzing their impact on the financial health of the company. But what is the difference? And why are financiers moving towards a models-based practice?
Forecasting VS Modeling
Forecasting is essential in accounting as it helps businesses maintain a cash flow to cover liabilities. On the other hand, financial modeling is critical for analyzing current operations and long-term forecasting.
Financial Forecasting: Pros and Cons
Pros
- Gain valuable insight: Look into past financial mistakes and learn from them
- Cost-saving: Anticipating a financial shift can help you cut unnecessary costs
Cons
- It’s never 100% accurate
- It can be resource-intensive
Financial Modeling: Pros and Cons
Pros
- Works to gain insights about deep-rooted workings of the company
- Uncover anomalies that an investor might miss
Cons
- If there is a lot of data, it can be time-consuming
- It can be inaccurate due to a large number of assumptions
Creating Model-Based Practices
A financial forecasting model-based approach reduces the strain on your resources and further reduces the time required. According to a study, the financial forecasting models approach cuts approximately 450 hours off your annual workload.
Although it may be more time-consuming, financiers urge businesses to make the switch for a more holistic overview of future planning. However, the process of switching to a financial forecasting model approach requires you to take a systematic approach.
Taking Advantage Of IT Services
The advent of the internet opened many avenues that were not accessible or thought of before, especially in finance.
The Information technology sector primarily focuses on developing advanced electronic networks to exchange information. Therefore, as all financial transactions primarily involve exchanging information, IT has begun to play a more significant role in global accounting and financial analysis.
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