The importance of forecasting and budgeting

Feb 7, 2022 | Blogs

Budgeting and forecasting are important if you want your business to be a success, as setting targets for income and expenditure stops you from ever having to do business blindly ever again.

The start of a new year is a great time to start with yours.

So, look ahead and make time to plan and budget for the tax you owe, payments on accounts, and other upcoming expenses. You might just be saving yourself from a world of headache down the road, too.

What is budgeting and forecasting?

Budgeting and forecasting help you create strategies, plan for the future, and align your goals across the entirety of your organisation.

You might think they are more or less the same thing, but that isn’t actually the case.

First, a budget is a detailed representation of the future results, financial position and cashflow that you want the business to achieve during a certain period of time.

Specifically, it involves identifying available resources and allocating them to different parts of the business in a carefully considered way.

A lot of business leaders update their budget just once a year, spending up to six months to complete it in some cases.

You will, of course, try to stick to your budget as much as possible and compare what you planned to whatever you actually made and saved later down the line. You’ll then have the opportunity to review your performance and make improvements for the next period.

In that sense, budgeting is all about long-term planning.

A forecast, on the other hand, is an estimate of what a business will actually achieve and is usually done at regular intervals – not just what you want to – usually on a monthly or quarterly basis.

As a result, forecasts are great tools for short-term operational consideration, usually focusing on revenue, expenses and cashflow.

After you have your projections, you should then update your key performance indicators, ultimately providing you clear insight into how your business is performing.

Benefits of budgeting and forecasting

Beyond the insight and clarity budgeting and forecasting can bring to the table, there are other benefits that demonstrate these processes are more than the part and parcel of business.

For instance, as budgeting forces management to examine every single one of your business’s financial activities, you can have the peace of mind that none of your money is being wasted.

It also makes your management team be more aware of the business’s finances, persuading them to be more economically minded.

This is true for the staff lower down the chain of command, too, as you will probably have to involve them in the process to make a good budget, which can instil a sense of ownership among them and motivate them to meet their budgeted goals.

And, since individual responsibilities are often clarified during budget season, dedicating time to one can prompt your team to step up if you face an unexpected challenging situation.

Forecasting, meanwhile, can keep you on course throughout your budget period and help you manage your cashflow to ensure you can achieve your goals.

Reliable forecasts are also almost essential if you want to apply yourself for financing and investment opportunities, while helping you create your next budget as the logical starting point for one.

Generate a budget and forecast

Neither budgets or forecasts are easy documents to put together. If we were to detail exactly what to do, we would be here all day.

At its most basic, your budget needs to take into account all your planned revenue, fixed costs for your business (employee salaries, rent, utilities, insurance, etc) and variable costs (supplies, travel, maintenance etc.)

For your forecast, use historical data of what you’re trying to measure (sales volume, cashflow, marketing expenses etc.) to identify trends before applying trends to your current data to come up with forecasted results.

There’s a lot that separates a useful budget or forecast from a bad one, so don’t hesitate to reach out to us for some advice.

Alternatively, we can help you put together an entire budget and forecast so you can run your business and clarity.

Ready to talk? Let’s start the conversation

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