Financial Forecasting

Financial Forecasting

Financial forecasting is used to provide organisations with a view of their potential liabilities and sustainability into the future. Depreciation is not explicitly funded for, but is included in the annual balance sheet and contributes to the annual profit or loss calculation.

Some of the key assumptions or constraints relevant to financial forecasting are:

  • All expenditure is stated in current dollar values, with no allowance made for inflation over the planning period
  • All costs and financial projections are GST exclusive
  • Operations and maintenance costs are generally shown to increase in proportion to the quantity of the asset.
  • Renewal costs are based on the findings of the renewal strategies
  • The costs of risk mitigation are included in the forecasts, however the potential costs that could arise through exposure to risk are not.
  • Replacement Cost, Depreciated Replacement Cost and Annual Depreciation are calculated for the 20- year period.

The financial forecasts are dependent on the above key assumptions. In accounting terms, the decline (or gain) in service potential is defined as the value of renewals less depreciation, and indicates the rate the asset is being consumed”. Forecasts need to be periodically updated as more accurate information comes to hand or when significant changes in assumptions occur. Some of the following events may result in a need to update financial forecasts:

  • Shortfall between projected and available funding
  • Significant changes to the asset register
  • Changes in risk profiles
  • Changes arising from the consequences of a natural disaster.