Undercast: Meaning, Operation, Examples

What Is Undercast?

Undercast is a forecasting error that occurs when estimates are below realized values. These estimates can apply to sales, expenses, income, cash flows, or any other financial account.

Key Takeaways

• Undercast refers to a forecasting error when estimated numbers are lower than realized numbers.
• The estimates can include sales, expenses, income, cash flows, or any other financial account or metric.
• Undercast estimates can occur due to a conservative management team or a volatile market.
• Dishonest undercast estimates can occur when management purposely lowers estimates to outperform them.
• Continuous undercasting indicates ineffective resource deployment based on poor estimates.

Understanding Undercast

Companies try to predict their financial performance for the upcoming year using forecasting models. These models consider inputs such as the economic environment, past performance, and changes in legislation.

Forecasts and budgets help companies allocate resources, identify efficient areas, and identify areas that need improvement. A company relies on the best and most up-to-date information when estimating operational numbers for the next 12 months.

The two main areas companies estimate are revenues and expenses, which determine expected profits. Managers compile relevant information and make assumptions, some of which may be uncertain and lead to undercast or overcast.

When a company’s actual results fall short of expectations, it has undercast that specific account. Frequent undercasting indicates a need for investigation.

Undercasting may reflect cautious or conservative management, especially in a volatile market. Continuous undercasting indicates poor understanding of the business environment and ineffective resource deployment.

It’s necessary to determine if undercast estimates result from compensation motives. For instance, managers may purposely undercast the budget to ensure better-than-estimated results and secure bonuses tied to performance.

Examples of Undercast

A steel manufacturer forecasts $3 billion in sales. However, due to tariffs protecting the domestic industry, it realizes $3.5 billion. The undercast of $500 million resulted from a change in legislation.

In another example, a technology firm’s management estimates $50 million in profits but reports $35 million to secure bonuses tied to performance. This dishonest undercast of $15 million ensures the actual profits surpass the reported estimate.

In another example, a technology firm’s management estimates $50 million in profits but reports $35 million to secure bonuses tied to performance. This dishonest undercast of $15 million ensures the actual profits surpass the reported estimate.