Forecasting: a powerful management tool

Abstract

Forecasting future financial results based on curren t management decisions is a major problem in mos t industries. Even though it is impossible to predic t precise dollar amounts for financial items to b e reported years after decisions are made, managemen t must be aware of the most probable range of value s for these various items. A major cause of this problem is the inability o f management to readily isolate mathematical relationships which may exist among various financial item s and apply these relationships in projecting futur e financial results. Isolation and application of mathematical relationships in many cases has been bypassed . Rules-of-thumb have been utilized by management due to the lack of knowledge of currentl y available statistical processes or the high cost an d extensive time required. The present speeds of computers make the use of rules-of-thumb unnecessary , as we are now capable of processing involved statistical techniques such as the Monte Carlo Technique . Management must be aware of the complex financial results created from curr ent decisions, and on e way to accomplish this is through the use of compute r models. Management must not only be aware o f occurrences in the industry, but it must continue t o be aware of the many changes in progress. It is important that present and potential management b e trained effectively and quickly in each facet of th e industry. With the large increase in the volume o f information, it is imperative that new techniques fo r training management in all areas be employed. A forecasting model has been designed an d implemented for the property and liability insuranc e industry at Georgia State University. The objectiv e of this model is to utilize mathematical relationship s that exist among specific property and liability annua l statement items to forecast future annual statemen t results. The computer model, designed and programme d by the author, is utilized to show the application-o f the mathematical relationships obtained in forecast-The column in this issue is concerned with "Forecast-ing—A Powerful Management Tool," and was prepared by W. Ray Bagwell Ph .D ., MAA ., an assistan t professor of insurance and information systems a t ing annual statement results based on current management decisions for a mythical company, Mode l Property and Liability Insurance Company. Some of the relationships isolated were as follows : …