Revenue forecasting, budget setting and risk

The budget-making process can be viewed as a problem of decision making under uncertainty since revenues are unknown at the time the budget is written. Revenue forecasts become information for describing the uncertainty in revenue receipts, thereby allowing the decision maker to trade off desire for a larger budget against the uncertainty in revenues. A chance constraint decision model is used to model this process. Application of the model to evaluate alternative forecasting techniques is then demonstrated for several revenue sources used in Kansas City, Missouri.