Question

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

1. What are the arguments for preparing profit forecasts?

Short answer

Profit forecasting helps in planning the company's growth strategy.

Step-by-step solution

Meaning of Profit Forecast

Profit forecasting refers to the estimate of future earnings after taking into account all of the elements that influence the magnitude of a company's profits, such as pricing policies, costing policies, and depreciation policies, among others.

Explaining the arguments for-profit forecasting

Arguments for mandating projections to be disclosed include:

1. Investment decisions are founded on future expectations; hence, knowing what to expect in the future can help you make better judgments.
2. Forecasts are already being passed about informally, but they are unregulated, usually inaccurate, and may not be available to all investors equally. This jumbled issue has to be straightened up.
3. As circumstances change so quickly these days, prior data is no longer a reliable predictor.