Financial forecasting is a process of projecting future financial requirements of a firm. Financial manager is concerned with the futurity of financial performance. Financial forecasting, an integral part of finance manager's job, is an act of deciding in advance the quantum of funds requirements of the firm and the time pattern of such requirements. In the process of financial forecasting, financial manager is supposed to develop projected financial statements. Efficient financial forecasting enables a financial manager to plan for future financing requirements and to identify the appropriate sources of funds to satisfy the financing needs. An efficient financial forecasting should consists of the following activities:
1. Setting up projected income statement and balance sheet so that the effect of operating plan on firm's future profit and other indicator of financial performance can be analyzed.
2. Determining need of financing to support firm's growth in sales and other investment opportunities.
3. Forecasting appropriate sources of financing that can be generated internally as well as externally.
4. Setting up proper mechanism of control relating to allocation and utilization of funds.