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Planning & Financial Management

Financial Forecasting

Forecasting is a key component in determining future operations, problems, and opportunities. Good financial forecasts benefit governments by enabling decision-makers to:

Governments at all levels find forecasting beneficial in determining available resources and developing budgeted expenditure amounts. Most public entities use forecasts that extend three to five years beyond the current budget period, although some entities use 10-year forecasts. In any case, the forecast should be monitored and updated on a regular basis.

Quantitative or qualitative methods, or a combination of both, can be used to develop forecasts. Qualitative methods are more intuitive and are based on the following types of information:

Quantitative methods include any of the following types of information:

While entities may use either of these methods, research has shown that combining qualitative and quantitative methods improves forecasting accuracy.

Regardless of which method or combination of methods is used to develop a forecast, the following steps should always be followed:

  1. Establish a base year.
  2. Assess revenue and expenditure growth trends.
  3. Clearly specify underlying assumptions.
  4. Select a forecasting method.
  5. Assess the reliability and validity of the data used to determine assumptions.
  6. Monitor actual revenue and expenditure levels against the forecast and explain variances.
  7. Update the forecast based on changes.

Ohio Examples

District Employs Year-Round Forecasting & Strategic Planning Process
Medina City School District (see audit page 2-9)

Financial ForecastingMedina has implemented leading practices in its forecasting and budgeting processes. The treasurer puts together forecast scenarios based upon reduction plans, state funding changes, levy attempts, and other information.

Forecasting is a year-round process. All administrators at the building and department level are involved in the budgeting process through the creation of their own respective budgets. Those budgets are presented to a central office committee for review. After the central office committee reviews the budgets, the five-year forecast is created and presented to the board and a citizen finance committee for review, input, and approval. The treasurer then gives presentations to the board throughout the year as changes are made to the forecast.

Forecasting Allows School Board to Anticipate Potential Problems
Chillicothe City School District (see audit page 2-14)

Chillicothe City Schools have instituted a process where the treasurer updates the five-year forecast on a monthly basis, and presents it at the school board meetings. This provides timely, up-to-date financial information for the board, which can be used to identify potential financial problems before they occur and to make incremental changes to improve performance over both the short and long term.

District Develops Multiple Budget Scenarios to Plan for Future
Springboro Community City School District (see audit page 1-5)

In Springboro, the treasurer creates separate scenarios for the superintendent and board to depict the district’s financial situation depending on various district outcomes. The treasurer also creates a spending plan, which is directly linked to the district forecast and compares how the district’s actual revenues and spending compares with the forecasted estimated amounts. This enables the district administration to view the district’s future financial conditions and make well informed decisions based on anticipated outcomes.

County Five-Year Plan Guides Decision Making
Montgomery County

Montgomery County’s Office of Management and Budget developed a General Fund, Five-Year Financial Plan for 2010-2014. The plan includes:

The practice of the development of long range financial planning for the County General Fund has assisted us in maintaining the financial stability of the fund through annual balanced budgets, favorable bond ratings and investments through economic development initiatives. Our Elected Officials, Agencies and Offices have collaborated with the County in the prudent use of taxpayer funds and maintaining excellent services despite many years of budget reductions. We continue to use the General Fund Financial Plan recommendations as a guiding principle as we develop our annual General Fund appropriations.” Tim Nolan
Director, Office of Management & Budget
Montgomery County

National Examples

Financial Plan Identifies Revenue, Anticipates Risks
City of Portland, Oregon

The City of Portland’s Office of Management & Finance creates and publishes a five-year General Fund forecast. The forecast focuses on the city’s projected financial condition, as well as the steps necessary for the city to control expenditures consistent with projected revenue. In addition, the forecast document identifies revenue and expense risks, or areas of likely volatility, that could affect the overall accuracy of the current forecasted financial position.

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