If you’re like most people, budgeting, and forecasting aren’t things you think about daily. But if you want to stay on top of your finances, it’s important to understand what is financial forecasting and budgeting and how you go about it.
This blog post will explain what is financial forecasting and budgeting and how to make these processes agile and ongoing.
What Is Financial Forecasting and Budgeting?
Financial forecasting and budgeting are essential practices in all business organizations. To understand them well, let’s discuss each in detail.
Financial forecasting is a critical tool for businesses to use when making decisions about the future. By analyzing past business performance and current business trends, companies can make informed decisions about where to allocate resources and how to best position themselves for success.
This information is used to make predictions about the future financial performance of a company. Financial forecasting can be used to make decisions about investment, pricing, and other strategic business decisions.
However, the financial forecasting process may vary depending on the type and purpose of the forecast. Different factors can influence the market, so it is important to know all potential outcomes when making a forecast.
Business is unpredictable. The market can change in ways that you don’t expect.
New technologies are changing how businesses operate at fundamental levels.
It’s essential to know your financial future, and the best way to do that is by regularly performing forecasts. This can help any business, including a monopoly, immensely.
A business’s annual budget is the amount of money it estimates it will earn and spend over a given time period.
Most budgets are evaluated and adjusted on a quarterly schedule.
Forecasting vs. Budgeting
Although forecasting and budgeting may look similar, there are significant differences. We will explain these similarities, as well as how budgets allocate funds and how forecasting allocates those funds.
Budgeting and financial forecasting are vital tools for business management. They also provide guidelines for recalibrating business plans. The finance team oversees both forecasting and final budgets. Both pull in historical data to make future assumptions.
Budgets allocate funds. However, there are important differences between budgets and financial forecasts. A budget is a budget for a particular time period, usually referred to as a fiscal year. A forecast can convince companies to make budget changes, but not the other way around.
Forecasting is used to make these allocations. Budgets set targets. Forecasts can help you determine if you will achieve them. Forecasting doesn’t give you information about what actually happened in your financial history. However, budgets use variance analysis to compare actual and expected results.
Both tools are essential and work well together to ensure business plans stay on track.
Budgeting or forecasting: which comes first?
Without a clear, achievable budget and plan, a forecasted revenue target has no real value. Budgets set targets for revenue and expenditure, while a forecast for sales gives insight into the company’s ability to achieve those objectives. By working in tandem, budgets, plans, and forecasting give companies a clear understanding of where they need to focus their resources and efforts to meet their business objectives.
Without a budget, the forecasts have no clear direction.
11 Steps You Can Follow to Budget and Forecast Effectively
The budget process can be a lot of work, and there will undoubtedly be some bumps in the road. Timelines, budgets, and other variables can all affect this process.
So, focus on the big picture, make a plan that makes sense, and realize that things will change.
Here are 11 steps you can follow to budget effectively for your small business.
1. Review your year-to-date performance
To correctly predict the future, you must first understand the present. For instance, what is your ratio of saying to do?
Did your business meet its goals for the first six months? Were they over or under-achieved?
Your budget is a reflection of your operations plan. Your financial projections are an interpretation of your strategic objectives.
Knowing your company’s operations’ who, what, where, when, and why will help you better allocate your marketing budget.
2. Reevaluate your long-term plan
By working closely with your CEO and your Chief Financial Officer, you can ensure that your long-term plan is aligned with your business strategy. This will ensure that everyone is moving in the same direction and that your team is working toward the same goals.
As you create your long-term business plan, you must account for any unexpected changes. This will ensure that the document’s top-level goals reflect your company’s projected growth and its corresponding funding needs.
3. Update an 18-Month Forecast (2H Current Year + Next Fiscal Year)
Review your 2-year forecasting using bottom-up budgeting. Are there any gaps between this plan and your long-term strategic plan?
If your business succeeds, it’s important to invest in optimization. As a leader in your organization, you can encourage others to do the same. This will help ensure that your company’s investments are driving optimal outcomes.
As an F&A manager, you help your organization’s leaders determine their goals and needs by moderating between investors and company executives.
4. Sum up your plan and present it to the board.
Present your proposal to your board. (You need their approval.).
5. Finalize your planning
Plan your yearly fundraising campaign with about 3-4 months left in your fiscal year. This should give the board enough time to review your plan and make necessary changes.
6. Plan for growth by products, regions, and segments
As you prepare to finalize your marketing plan, ask: Where will our marketing grow from? How will it be achieved?
As we prepare our business plan, we need to consider where our future growth will come from. Are we going to focus on new markets, new products, or different business models? These are all important considerations for our long-term strategy.
When planning, align your performance metrics with the overall business strategy. This will ensure you’re driving the business in leaps, not steps.
7. Review and update your commission plans
Keeping your commissions and incentives in line with your business strategy ensures everyone is working in the same direction. Having these in alignment will create a more cohesive team.
After establishing your quotas, your management team will plan your yearly goals.
8. Review your Q4 plan
As the end of the year approaches, it’s a good time to validate your forecast against your approved budget for the year. If nothing’s changed, then you can continue as is.
If there are any significant changes to your business’s trajectory or performance, it is important to make the necessary adjustments before the start of your next fiscal year. This will help ensure that your business is on track to meet its goals and objectives.
9. Send the finalized budget to the business
After all the hard work you’ve put into creating your budget, it’s finally time to distribute it to all the relevant stakeholders. This formal communication will help ensure that everyone is working off the same plan and help avoid misunderstandings.
10. Yearly Kickoff
Share your company’s goals, operations plan, and annual operating budget with your team.
11. Keep budgeting and forecasting agile, ongoing processes
Budgeting and forecasting is an ongoing process that should be reviewed monthly, quarterly, and annually to ensure your business is on track to meet its goals. By comparing actual results against your budget and forecast, you can make agile adjustments to keep your business growing.
Now you know what is financial forecasting and budgeting. Budgeting and forecasting are essential tools that help you stay on top of your finances. By understanding how to make budgeting and forecasting an agile, ongoing process, you can more easily keep track of your spending and ensure that your financial goals are achievable.