Incorporating Risk in Revenue Forecasting

In “Fiscal Planning, Budgeting, and Re-Budgeting Using Revenue Semaphores” Cornia, Nelson, and Wilko affirm that risk and uncertainty measures should be incorporated into budgeting process to improve real-time budgeting and reduce adverse effects.

To make revenue forecast more accurate, they argue that methodological innovations and software development should be considered while projecting revenues.

The case studied is the budgeting planning process of the state of Utah.

Revenue Forecasting

In “Betting on the Future with a Cloudy Crystal Ball” Thompson and Gates talk about the challenges of revenue forecasting.

Economic growth is the main factor influencing revenue forecasting. As this indicator is always changing, it is impossible to determine revenue forecasts accurately. Therefore, budget specialists should be concerned about managing volatility by asking themselves the following question: “How can we get a good result no matter what the economy throws at us?”

Four tools contribute to this financial analysis: growth, portfolio, hedging, and consumption smoothing.

In terms of growth, it is essential to use the average of past revenue growth. For portfolio, it is important to understand the relation between taxes. As far as hedging is concerned, creating a revenue flow of equal size and opposite volatility consists of the cheapest and most direct way to address systematic changes. And regarding consumption smoothing, the use of borrowing and savings smooth out consumption over time.