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14.4 IMPORTANCE OF FORECASTS The dictionary defines “to forecast” as “to calculate or predict some future event or condition, usually as a result of study and analysis of available pertinent data.”

From the manager’s viewpoint, forecasted data are information used for purposes of planning for the future. Forecasting, to some degree or another, is often required when producing budgets. (Budgets are the subject of two of the following chapters.) It is pretty simple today to create “what if” scenarios on the computer. But the important thing for managers to remember is that assumptions directly affect the results of forecasts.

Forecasts Versus Projections

Forecasts are different than projections, although both are considered to be “prospective” and thus “future” financial statements. Forecasts are based on assumptions that are expected to exist, and that reflect actions that are expected to occur. Projections, on the other hand, are views further into the future. Because they are further into the future, we “project” future events, projects, or operations using a set of presumed, or hypothetical, assumptions.

We are discussing forecasts in this chapter rather than projections. Therefore, these forecasts are relatively short term and can be based on realistic assumptions that we expect to exist, along with actions that we can reasonably expect to occur.

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Forecasting Approaches

The approach to producing a forecast usually involves three different sources of information and forecast assumptions:

■ The first level derives from the personnel who are directly involved in the department or unit. They know the operation and can provide important ground-level detail.

■ The second level comes from electronic and statistical information, including trend analysis. Electronic reports can provide a thicket of information, and there is a skill to selecting relevant information for forecasting purposes.

■ The third level represents executive-level judgment that is typically applied to a preliminary rough draft of the forecast. For example, adjusting volume upward or downward due to the anticipated future impact of local competition would most likely be an executive-level judgment.

The amount and type of electronic information that is readily available greatly affects the forecast difficulty. Electronic templates and standardized worksheets may also greatly influence the final forecast results.

Common Types of Forecasts in Healthcare Organizations

The three most common types of forecasts found in most healthcare organizations include revenue forecasts, staffing forecasts, and operating expense forecasts. (The operating expense forecast, which is not as common, would generally cover those operating expenses other than labor.) This section will discuss revenue and staffing forecasts, as they are what most managers will need to deal with.