What is an overcast sky
Overcast weather is a forecast error that occurs when estimating a measure, such as future cash flows, performance levels, or production. Supercooling occurs when the estimated value turns out to be greater than the realized value.
Overcast skies are caused by various forecasting factors. The main factor that results in supercooling is the use of bad inputs. For example, when estimating a company’s net income for next year, you can overcharge the amount if you underestimate the costs or overestimate the sales.
Overcast and overcast
An overcast or undercast sky is not realized until after the end of the estimated period. Although this can generally apply to forecasts of budget items, such as sales and costs, these errors are also found when estimating other items. Uncertainties and the things that require estimates are areas where analysts and construction forecasts need to exercise judgment. The assumptions used may prove to be incorrect, or unforeseen circumstances may arise, which leads to over-casting or undercasting.
Overbilling could indicate aggressive estimates or aggressive accounting. Excessive cover should be investigated. Company employees may be too promising to please senior management. Or the company may be hoping to retain its current shareholders and perhaps try to attract additional shareholders with aggressive expectations.
Example of overcasting
If ABC Company expects to generate $ 10 million in sales for the year, but ultimately only reports $ 8 million, a $ 2 million hedge has occurred. This can happen for a variety of reasons. If, during the budgeting or forecasting process, the company overestimates the average selling price of the units, all other things being equal, this may result in cover. In addition, if it overestimates the expected number of units sold, this can result in overcast conditions.
If the same company plans to generate a net profit of $ 1 million but generates $ 800,000, this is also covered. The reasons for net income cover can be many. They can include overestimating sales or underestimating costs, such as employee expenses, inventory purchases, or marketing costs.
The idea of supercooling or under-projection can extend beyond company budgets to other forecasts, such as the number of products or parts that a factory can produce in a week. If a factory predicts that it can create 13,000 pieces in a week, but produces 12,900, there has been overcast weather. It can also be applied to an investor’s portfolio. If an investor expects to receive $ 1,000 a year in dividends, but due to a decrease in dividends, he receives $ 750, dividend income of $ 250 has arisen.