Podcast
Questions and Answers
Forecasting models and techniques are completely free from human biases and errors.
Forecasting models and techniques are completely free from human biases and errors.
False (B)
Budgeting primarily aims to predict future economic trends.
Budgeting primarily aims to predict future economic trends.
False (B)
Forecasting can be either a short-term or long-term process.
Forecasting can be either a short-term or long-term process.
True (A)
Economic systems are simple and easy to predict accurately.
Economic systems are simple and easy to predict accurately.
The output of budgeting includes forecasts of future events.
The output of budgeting includes forecasts of future events.
Zero Based Budgeting requires justifying every expense to avoid budget creep.
Zero Based Budgeting requires justifying every expense to avoid budget creep.
The S Curve indicates that growth occurs in a linear fashion.
The S Curve indicates that growth occurs in a linear fashion.
The 50/30/20 budgeting rule should be strictly followed regardless of income changes.
The 50/30/20 budgeting rule should be strictly followed regardless of income changes.
In Zero Based Budgeting, monitoring and adapting the budget is unnecessary once it is set.
In Zero Based Budgeting, monitoring and adapting the budget is unnecessary once it is set.
Long-term predictions inherently possess higher reliability compared to short-term predictions.
Long-term predictions inherently possess higher reliability compared to short-term predictions.
Unusual data points can serve as indicators of potential risks in budgeting.
Unusual data points can serve as indicators of potential risks in budgeting.
A primary benefit of Zero Based Budgeting is the promotion of better cost control.
A primary benefit of Zero Based Budgeting is the promotion of better cost control.
Resource intensive processes are not a concern when applying the 50/30/20 rule.
Resource intensive processes are not a concern when applying the 50/30/20 rule.
Incremental budgeting is known for its user friendliness and ease of implementation.
Incremental budgeting is known for its user friendliness and ease of implementation.
Activity based budgeting focuses solely on departmental spending without considering activity costs.
Activity based budgeting focuses solely on departmental spending without considering activity costs.
One of the advantages of incremental budgeting is its risk of budgetary slippage.
One of the advantages of incremental budgeting is its risk of budgetary slippage.
Activity based budgeting can help eliminate bottlenecks for smoother functionality within an organization.
Activity based budgeting can help eliminate bottlenecks for smoother functionality within an organization.
The value proposition in budgeting is easy to quantify and does not require much time.
The value proposition in budgeting is easy to quantify and does not require much time.
Forecasting in incremental budgeting accounts for new product lines or mixes.
Forecasting in incremental budgeting accounts for new product lines or mixes.
Activity based budgeting simplifies understanding of resource consumption across departments.
Activity based budgeting simplifies understanding of resource consumption across departments.
One key advantage of value proposition budgeting is that it aligns business and IT strategies effectively.
One key advantage of value proposition budgeting is that it aligns business and IT strategies effectively.
Flashcards
Budgeting
Budgeting
The process of creating a financial plan outlining expected income and expenses over a specific period, assigning funds to various activities, and comparing actual spending to the plan.
Forecasting
Forecasting
Predicting future trends in economic variables like sales, demand, and production, for informed business decisions.
Human Error in Forecasting
Human Error in Forecasting
A common cause of inaccurate forecasts, arising from human limitations like personal biases and incorrect judgments.
Complexity of Economic Systems
Complexity of Economic Systems
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Forecasting vs Budgeting
Forecasting vs Budgeting
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Zero-Based Budgeting (ZBB)
Zero-Based Budgeting (ZBB)
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50/30/20 Budget Rule
50/30/20 Budget Rule
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S-Curve Growth Pattern
S-Curve Growth Pattern
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Adjusting 50/30/20 During Income Changes
Adjusting 50/30/20 During Income Changes
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Uncertainty in Long-Term Forecasting
Uncertainty in Long-Term Forecasting
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Regular Budget Review
Regular Budget Review
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Identifying Outliers in Data
Identifying Outliers in Data
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Overlooking Significant Expenses
Overlooking Significant Expenses
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Incremental Budgeting
Incremental Budgeting
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Activity-Based Budgeting
Activity-Based Budgeting
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Value Proposition Budgeting
Value Proposition Budgeting
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Incremental Budgeting
Incremental Budgeting
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Activity-Based Budgeting
Activity-Based Budgeting
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Value Proposition Budgeting
Value Proposition Budgeting
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Activity Based Budgeting
Activity Based Budgeting
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Value Proposition Budgeting
Value Proposition Budgeting
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Study Notes
Forecasting and Estimation Techniques
- Forecasting is predicting future conditions/trends/outcomes using historical data, current conditions, and statistical analysis.
- Examples include: What will sales be next year? How much demand will a product have? What resources will be needed in the future?
- Forecasting is important for better planning, risk reduction, improved decision-making, operational efficiency, and gaining a strategic advantage.
Importance in Managerial Decision-Making
- Better Planning: Managers establish realistic goals and effectively allocate resources.
- Risk Reduction: Identifying potential challenges/opportunities helps managers prepare for economic downturns or market changes.
- Improved Decision-Making: Data-driven forecasts provide a basis for investments, pricing, and expansion strategies.
- Operational Efficiency: Optimizing inventory, preventing overproduction, and minimizing waste are enhanced by accurately predicting demand.
- Strategic Advantage: Anticipating market trends and adapting strategies proactively gives businesses a competitive edge.
Qualitative Methods in Forecasting
- Qualitative methods use professional judgment to forecast future company performance.
- Skilled staff members determine the connection between current and potential future company performance to estimate future performance.
- Methods may include Delphi Method and Market Research.
- The Delphi Method: A panel of specialists are interviewed one-on-one to gather insights. This avoids group pressure and ensures independent expert opinions shape predictions.
- Market Research: Assessing the success of a company's services/products using real-world customer interactions. Various methods exist, like focus groups, surveys, and product testing.
Quantitative Methods in Forecasting
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Quantitative methods involve mathematical processes to forecast future performance based on past trends and data patterns. These methods commonly apply statistical models to forecast a company’s potential future performance using past data.
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Naive Forecasting: A simple method that assumes future performance will match the most recent past performance.
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Seasonal Forecasting: Evaluating historical data to identify seasonal patterns and trends to predict future performance.
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Revenue Run Rate: A financial performance indicator that converts a company's current revenue into an annual figure.
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Historical Growth Rate: A method for predicting future growth in business performance by studying how much in the past the business changed and finding a comparison by the change in percentage.
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Linear Regression: A method that analyzes a given dataset to determine variables that have the most relation that leads to understanding certain variables.
Time Series Analysis
- Time series analysis examines data patterns and trends over time to predict future values. It analyzes how data values in a series change over time. Each data observation is dependent on preceding values.
Econometric Models
- Econometric models use statistical and mathematical models to develop economic theories, test hypotheses, and forecast future trends using historical data.
Combined/Hybrid Approach to Forecasting
- A combined approach integrates qualitative and quantitative forecasting methods to produce more accurate forecasts and improve reliability.
- This improves a business's ability to respond effectively to market dynamics and uncertainties using diverse methodologies, incorporating statistical and machine learning techniques to maximize adaptability and accuracy.
Zero-Based Budgeting
- Requires starting from nothing to justify each expense or budget item.
- Focuses on efficiency, accuracy, and reducing waste.
- Requires extensive planning and potentially more resources.
50/30/20 Budget Rule
- Suggests allocating 50% of income to needs, 30% to wants, and 20% to savings.
- Offers a basic budgeting framework, but adjustments are recommended based on individual financial situations and circumstances.
Key Limitations of Forecasting
- Unexpected events (disasters, crises, etc.) may invalidate forecasts.
- Data inaccuracy or unavailability can lead to unreliable forecasts.
- Human error from data interpretation or model assumptions can contribute to inaccuracies.
- The complexity of economic systems makes it hard to predict the future perfectly.
Forecasting vs. Budgeting
- Forecasting focuses on predicting future trends.
- Budgeting allocates resources for specific activities.
- Forecasting is used to inform the budgeting process.
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