The end-of-year lull is a great time to plan ahead. You’ll need to project your next year’s operating expenses as well as fixed costs of business. Income projections and financial forecasting are also necessary to help you have a guide to follow.
However, even with plans that try to account for every possible outcome, issues can still hit you that you wouldn’t expect. That’s why you’ll need to make forecasts to inform your budget periodically.
Budget vs. Forecast: What’s the Difference?
Knowing how to budget and when to use a forecast are both critical tools to help manage company finances. Most financial departments will need to take advantage of both budgeting and forecasting. But just because evaluating together doesn’t mean they’re the same thing.
Your Annual Budget
Most budgets are only created once. Departments try to make an overall budget to guide their actions and operations. As a business, your goal is to make your budget a reality by using them as both an analytical and aspirational tool.
Within a budget, you can find things like revenue and expense estimates, where cash flow will come from, or if any debt could be reduced. Once that period is over, most company financial departments will take the budget and compare it to what happened. This type of review is a helpful way for companies to see if they need to change how much money they put aside for each department. It’s also a great way to identify solutions to problems that are bringing the company down.
Forecasts play more fast and loose than budgets do. They can focus on a specific aspect of your business, like predicting this year’s holiday sales based on what happened last year. You can also use financial forecasting to help you make decisions on what sorts of loans would be best for your business. A budget forecast can be used when you first create your company budget or even be used as a supplement when conditions in the workplace change.
Where a budget looks forward, financial forecasting looks backward. This practice uses historical data to estimate how your business will perform in the future. Forecasting can help inform future budgets and determining how much should be set aside for each category. Forecasts are also regularly updated anytime business plans, inventory or operations change.
Creating a Business Budget: What Belongs Here?
Not everything your financial department works on belongs in your budget. Most of the time, a budget is made of revenues and expenses, assets and liabilities, and financial goals.
Revenues and Expenses
Revenue streams and business expenses are the financial backbones of your company.
Estimating cash flow too high is more of a problem than guessing too low. Use revenue estimates that are lower than you think will happen when creating your budget.
Asset tracking also needs to be part of your budget. Fixed asset depreciation may not cost you much money upfront, yet you still need to account for it in your budget. It also plays a big part in how you budget for maintenance and repairs.
Assets and Liabilities
Your business has fixed and discretionary expenses that you must manage in your budget. You also need to make space to account for your fixed assets as well as those that are less tangible. A cloud-based platform created for tracking assets can help you collect this information to inform your budget better.
Financial goals are an essential part of helping your business grow and expand. Aim to beat projected cash flows and find a way to include that in your budget. Along with your goals, you’ll also want to create a plan for rewarding performance and how to use any surplus. If you build upgrades into your budget, you are reinvesting in the future of your company.
Your management team will want to conduct financial forecasting for your upcoming year based on how things have been going for your company for the past twelve months. Ask your team members to estimate as best as they can assuming you won’t change anything.
Reviewing past business performance is the best way to provide meaningful insight into what your company needs to change to move forward. Conducting audits and reviewing trends can help your business figure out how to scale future obstacles and how to proceed with potential opportunities.
Analyzing your own company isn’t enough. You’ll need to review trends in your industry at large and figure out how they’ll affect your business. How can you evaluate the performance of other companies in your field and take lessons that will apply to how your business operates?
Remember that forecasts aren’t always accurate. Think of it like a weather forecast. Sometimes they can be hit and miss, but it doesn’t mean they aren’t valuable. Forecasts are vital if you hope to stay competitive and resilient in the long run.
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