Reviewed by Feb 19, 2021| Updated on
A cloud is a forecast error that occurs when estimating a metric, such as future cash flows, levels of performance or production. Overcasting occurs when the value estimated is above the value realized.
A number of forecasting variables cause overcasting. The main factor contributing to overcasting is the abuse of inputs. For example, if you underestimate costs or overestimate revenue, one may overestimate the amount when calculating a company's net profit for next year.
An overcast or undercast shall not occur until after the end of the estimated period. Although it can generally refer to budget item forecasting, such as revenues and costs, these errors are also seen when predicting certain items. Uncertainties and items requiring estimates are areas where judgment must be used by analysts and those building projections. The assumptions used can prove to be wrong, or unforeseen circumstances may arise, which leads to overcasting or undercasting.
Overcasting could be representative of conservative or cautious accounting assumptions. One should investigate consistent overcasting. Employees at the company could be over-promising to appease top management. Or the company may expect to keep existing shareholders and try to attract new shareholders with ambitious forecasts.