Improve your business plan and learn the difference between budgeting and forecasting
If you’ve always thought forecasting and budgeting are one in the same, you are not alone. Many owners of SME struggle with this concept.
Whether you are just starting out, or have already established your business, it’s important to have an accurate forecast and budget, as they work together to ensure profitability. While they are equally important, forecasts and budgets are actually two very different financial animals. A budget is an outline to determine how you want to grow and build your company, and where you plan to spend your money. It doesn’t predict what will happen, but instead outlines what you want to happen. A forecast predicts what your financials could look like months—or even years—into the future, based on historical data.
Let’s analyse the differences between budgeting and forecasting—and why you should introduce them into your business plan right now.
Your business budget is a financial roadmap for your business. In other words, it shows where you want to go during the upcoming fiscal year—and how to get there.
Budgets are usually created and evaluated once a year. The end product will show your current financial position, cash flows, and goals by estimating expenses and the amount of revenue needed to stay on track and financially sound. Put simply, budgeting creates a benchmark so that you can measure your progress and performance on an ongoing basis.
Here’s Why Budgeting Matters:
A budget is your business plan. It maps out where you want to be in the next few years. Without it, it’s hard to measure success. Implementing and adhering to a budget is an important step in ensuring that your business is growing in the right direction.
Are you ready to start on your budget? Keep these points in mind:
- Be realistic when projecting your future cash-flow. Your revenue forecasts will assist in these projections, but you can never be 100% certain that these predictions will materialize. It’s usually best to be conservative.
- Understand the difference between essential and non-essential expenses, and keep all unnecessary spending to a minimum.
- Make sure you’re giving your business some maneuverability. Consider incorporating cash reserves into your budget in order to cushion you if necessary. If you need some advice making this happen, consider using the insight of an outsourced CFO.
Financial forecasting is a guide that helps you reach your business goals, by offering data-based insight on where your business is actually going. This helps you effectively prepare for any eventualities and possible outcomes. Your budget, in turn, is built around these predictions, so you can be assured that you are working on a solid foundation.
Here’s Why Forecasting Matters:
Your forecast gives your business agility. Fueled by real-time data, a forecast grounds your predictions in reality so you can make smarter business decisions. Unlike budgets, a forecast also helps you react and adjust to change. For example, maybe you forecasted business growth based on retaining that one large client. If the contract ends, you can quickly adjust your forecast to compensate for the loss.
Forecasting Best Practices
Things can change fast. Here’s how to ensure you’re prepared for anything:
- Keep your forecasting ongoing. Make sure you’re checking in with key stakeholders often and regularly forecasting to make adjustments to spending throughout the year.
- Make sure you’re accounting for every possible outcome. You can build out several forecasts to reflect a range of possible outlooks (optimistic, pessimistic and most plausible). For example, how will you handle an unexpectedly slow month in sales?
- Have a plan in place for whatever outcome materializes. With several forecasts, there are several possibilities.
Make sure you have the right tools in place to accurately understand where your business is and where it’s going, and get expert advice if needed.
If you need assistance with your budgeting, and accounting services, contact OCFO and learn about our remote accounting services and available packages. Our team can assist with your initial cash flow planning and management, and make sure that your business is set up for profitability. Find out more at ocfo.com, or reach us at firstname.lastname@example.org.