The Importance of Forecasting & Budgeting
Is it possible to predict the future? Yes! Forecasting and budgeting are solid business practices that can help owners see what's ahead. By making assumptions about the future (forecasting) and designating funds to meet those assumptions (budgeting), company executives can gain a clear picture of their business' current state, and create an efficient pathway to get where they want to go.
Getting Started
Most companies begin forecasting and budgeting with the beginning of a new fiscal year. The process can be as simple as setting up a basic spreadsheet using categories from last year's financial statements as a baseline. Fill in expense numbers — supplies, wages, maintenance and other important expenses. You can use last year's results or even a three-year average, whatever is more reflective of your expected results.
Forecasting revenues is a little harder, especially in today's economy. Try it two ways: first try to forecast sales and see how much you have to work with after subtracting your expenses. Then do the opposite — start with your expenses and figure out where sales need to be to cover them plus the desired profit.
Also consider industry benchmarks, which are usually available from trade or industry organizations. Are your expenses in line with other companies like yours? Are your margins comparable? Comparing the company to others in its industry will illuminate its current strengths and opportunities for improvement.
Setting Targets
Once you have an overall picture of where your company is, you can set targets for growth and increased profitability. Say you want to grow by 10% next year. How will you get there? Do you need more people? More R&D? If so, how will you fund this expansion?
A good place to start is by identifying the highs and lows in both income and expenses. Examining monthly cash flows will allow the company to set realistic goals and encourage better decision-making.
Input your income and expense numbers. Can you reduce expenses in one line item, such as utilities or insurance, and strategically move the savings to another? Is your investment strategy sufficient for funding your future? Are there seasonal ups and downs you need to accommodate? Getting the big picture will help you answer all of these questions.
Budget vs. Performance
After a few months, go back and assess where the company landed. Were you successful in meeting your budgetary goals? Where did the company fall short and where did it exceed expectations? Knowing these performance details will allow the executive team to evaluate processes and people, and formalize expectations and incentives.
Moreover, armed with these numbers, company management can play out various “what if?” scenarios simply by plugging in different numbers. What if you opened a new store? What if you gained 10% more market share? What if you trimmed expenses by 5% across the board?
Remember, the process gets easier the more often you do it. Forecasting and budgeting are sound business practices that will provide great insight into the company’s past, present and future.
Are you unsure how to get started with budgeting and forecasting? We can help.