Budgeting and forecasting are essential if you want your business to be a success; setting realistic targets for income and expenditure prevents you from having to do business blindly again.
The start of the new year is a good time to step up your efforts, especially given the tough economic conditions businesses may face throughout 2023.
Read on for our summary of the best practices for effective budgeting and forecasting.
What is budgeting and forecasting?
On the surface level, you might think budgeting and forecasting are more or less the same thing. While they are closely related, this isn’t actually the case.
The key difference between a budget and a forecast is that a budget lays out the plan for what you want to achieve, while a forecast states what you expect to achieve.
More specifically, to create a budget, you identify resources available to you and allocate them to different parts of your business in a carefully considered way.
Usually, this happens once a year and typically takes between three and six months to complete; budgeting is, therefore, all about long-term planning.
Forecasts, on the other hand, are estimates of your business’s financial future and are usually done on a monthly or quarterly basis. You do that by analysing trends, patterns, and current and historical data in your business.
There area range of forecasts you can use to project your business’s future developments, including:
- general business
- financial
- cashflow
- accounting
- demand
- sales
- capital.
Benefits of budgets and forecasts
First and foremost, budgets and forecasts provide a level of insight and clarity any business needs to run with a water-tight finance structure.
They’re also an instrumental part of growth plans, which are all about using the cash you have to do bigger and better things. Investors and banks, meanwhile, will want to see a business plan before they entrust you with their money, and no business plan is complete without budgets and forecasts.
Budgets
Business budgets are great to make sure every penny you own is being used wisely. Just like a personal budget, they’re essentially promises to yourself, forcing you to carefully consider every purchase you make.
It also forces your team to use your money wisely, while providing a perfect way to examine their performance – if they go over budget, that calls into question their financial management; if they do more than expected with 10% less than they were allocated, it’s a good sign.
Budgets also help you prepare for unexpected events, like an unforeseen rise in energy prices or raw materials. We’d always recommend you set aside an emergency fund in your budget for occurrences like this.
And, if you do realise you have to cut funding in your business to cover costs, you’ll already have a comprehensive summary of where all your funds are allocated!
Forecasts
Forecasts help you stay on course throughout your budget period. By looking at your past to predict your future, you may also be able to spot opportunities to go for and difficulties to steer clear of.
The best forecasters won’t just make one forecast and call it a day; instead, they’ll make multiple of the same forecast but with different assumptions (lower cashflow, fewer sales, etc), so that you have an idea of how your business will perform – no matter what the future holds.
Making budgets and forecasts
Neither budgets nor forecasts are easy documents to put together, and unfortunately, we don’t have the room to detail everything you need to know in the remainder of this blog.
At its most basic, though, your budget needs to take into account all your planned revenue, fixed costs (employee salaries, rent, utilities, insurance, etc) and variable costs (supplies, travel, maintenance, etc).
To make a forecast, use the historical data of what you’re trying to measure, such as sales volume, cashflow, marketing expenses, etc. You should then be able to spot trends than you can apply to your current data to create forecasted results.
Again, there’s a lot more to budgeting and forecasting than just that, so feel free to get in touch with us for more information and advice.