In the fast-paced world of business, it’s easy to get swept up in the day-to-day operations and lose sight of the bigger financial picture. That’s why budgeting and forecasting are essential tools for any successful business. By creating a roadmap for the financial future and tracking the progress along the way, it can stay ahead of the game and make informed decisions that will drive the business toward greater success. Whether it is a seasoned entrepreneur or just starting, mastering the art of budgeting and forecasting is a must.
Importance of budgeting and forecasting for businesses
Budgeting and forecasting are crucial for businesses to better understand the financial health of the company and make informed decisions for the company’s growth and success. It allows for the identification of areas where it may be overspending or underutilizing resources, leading to increased efficiency and profitability. And let’s not forget, potential investors and lenders often require detailed financial plans before investing or lending money to a business. So, by having a well-prepared budget and forecast, it can instill confidence in potential investors and lenders, making it easier to secure funding.
How to do budgeting and forecasting
Being an executive, finance leader, or operations professional, they might be involved in budgeting and forecasting processes to some degree. And improving the processes must be their top priority. They can utilize these techniques to reduce costs, prevent late fees and penalties, and prepare for upcoming expenses and revenue. This approach allows them to effectively manage both immediate and future objectives, providing a framework for long-term success. Also, ensure to automate the process using software to maintain accuracy and consistency in their financial planning.
Building a budget
Budgets should always be as detailed as possible. Add all planned revenue details—including the types, value and estimated turnaround to expect it. Include fixed costs ( salaries, rent, utilities, taxes, etc.) and variable costs (travel and vehicle expenses, service expense, maintenance, etc.) of the business.
Once there is a list of items to add to the budget, follow these steps:
- Analyze historical data of expenses and revenue expectations for each fiscal month and year.
- Formulate a plan by discussing with sales leaders, budget owners, and C-suite executives.
- Identify any necessary expenditures such as equipment, infrastructure, and so on, during the budgeted period. Additionally, determine the KPIs to evaluate how the budgeting outcomes compare to previous years.
- Using budgeting tools, prepare a balance sheet, income statement, and cash flow.
- Review the final budget to find any strategic growth opportunities that can add or reduce debt/equity.
Generating Forecasts
Updating financial forecasts periodically with the latest actuals during the budgeted period helps in better assessing a business’s performance against its budgeted goals.
- To generate reliable financial forecasts, it is essential to identify the key metrics to focus on, such as sales volume and marketing expenses.
- Next, gather the latest actuals and input them into the forecast template, taking into account any variables that could affect the forecast.
- Determine the time frame for the forecast and calculate trends based on the historical and year-to-date actuals.
- Apply these trend calculations to your real-time numbers to generate forecasted results.
- Rolling forecasts are even more beneficial than periodic forecasts because they extend beyond the current fiscal year.