Undercast is a type of forecasting error that occurs when estimates turn out to be below realized values. These estimates could apply to sales, an expense line item, net income, cash flow, or any other financial account.
Breakin Down Undercast
Undercast (or overcast) amounts will not be known until the period in question concludes. When a company in the private sector, government agency or nonprofit organization prepares its budget for the upcoming year, it relies on its best and most up-to-date information to estimate what the operational numbers will look like for the next 12 months. Managers of these entities pull together all relevant information and make assumptions. Sometimes these assumptions are subject to greater degrees of uncertainty, which may ultimately cause an undercast or overcast to actual results. An undercast situation is akin to budgetary slack, and if undercasting occurs frequently, the causes should be investigated. Undercasting of sales or profits could be a reflection of cautious or conservative management, particularly if its market or the general economy is in a state of flux, but it should also be determined whether compensation motives are at work. A low-profit forecast would be easier to beat to obtain a bonus.
A steel manufacturer forecasts $3 billion in sales for the year. However, due to the imposition of tariffs to protect the domestic industry from foreign imports, the company realizes $3.5 billion in sales. The undercast amount was $500 million, but this was due to an unforeseen circumstance. As another example, a technology company that recently went public reported its first quarterly earnings results. Marketing and sales expenses were $250 million, $30 million higher than the company forecasted for the quarter. Finally, the Internal Revenue Service (IRS) projected that it would collect $3.3 trillion in a fiscal year. It had undercast the amount by $100 billion because it ended up collecting $3.4 trillion.