10 Tips to Make an Awesome Budget and Forecast

Dwight Eisenhower once said, “Plans are worthless, but planning is everything.” While he was talking about war, the same concept applies to business, and budgets in particular. Budgets are usually wrong the moment they are created because they are based on last year’s information and projecting assumptions months in advance. However the process of analyzing the previous years numbers and identifying the levers to increase those numbers is invaluable. A great budget also provides an attainable, thought out goal to move toward.

Most people refer to budgets as road maps, which can make one think it has to be strictly adhered to, but we think of them more as itineraries, which are meant to outline goals and guide your journey. Goals we like to focus on in the budget are improving services and support, optimizing operations, enhancing quality of life for your staff and ,of course, increasing revenue.

Like any process in your business, budgeting works best when it’s simple. Here are our 10 tips for creating a simple budget and utilizing it effectively.

1. Say Goodbye to Excel
While some old school CFOs like to use spreadsheets, we suggest using QuickBooks Online because it’s fast, easy and cloudbased, so you and your team can access it from anywhere. QBO has a great budgeting feature that uses actual data from the prior year and allows you to easily convert many line items at once into an equal monthly view, so much of the heavy lifting is already done for you. You can also create budgets by Class, Location and Customer, which is very important for Government Contractors and other small businesses.

Check out our article on How to Create a Budget in QuickBooks Online here.

2. Set a Benchmark
If you’re a new business, you will need to start from scratch. Professional service firms like lawyers, engineers, government contractors and doctors can reach out to your local association like the Arlington Bar Association or the Arlington County Medical Society to ask for financial or benchmarking data to base your projected growth against. You can also reach out to similar businesses to see if they’ll share financial numbers as a new business. In accounting we have a Management of Accounting group that shares this information with other members. If you’re a startup you may have to model your budget to a similar business. For example Facebook may have modeled their ad revenue forecasts based on Google Adwords.

Check out our article on How to Benchmark Your Industry for more resources. 

3. Be Flexible
There is only one constant, and that is change. So having an ultra rigid budget and forecast isn’t just unhelpful it’s damaging. Follow the plan, but also factor in changes throughout the year and adjust accordingly. This is not only for the business, but also employee goals set to the budget, which can be frustrating if they are held to metrics that have become out-of-date as the year progresses. Being flexible in your budget and forecast reviews will allow for more accuracy as the year progresses and better results for the business.

4. Use Rolling Forecasts and Budgets
We prefer rolling forecasts and budgets, so you can react on present results, not on assumptions made several months ago. Through a rolling process, you update the forecast and budget each quarter or month, so you make a broad assumption early in the year when you create the budget and focus and refine it each review to better align with your plan while also improving the accuracy of your projections.

5. Make a Plan. Then Budget.
Have a company discussion and set specific goals for the year based on actual revenue, whether it be a 40% increase in revenue or doubling your staff capacity, and then budget toward those goals. Making spending decisions based on actual revenue versus opportunities that may not happen pushes you to address how expenditures will affect the business and also allow you flexibility to go after unexpected opportunities later in the year, especially with a rolling budget and forecast.

6. Set Clear Goals
A major inefficiency within a company is failure to know exactly what resources are needed at any given time. Whether it’s cash flow, personnel (how many employees are needed to prevent overstaffing or understaffing to achieve this quarter’s goals?), or materials, a forecast set in clear goals tells you what resources you need, when you need them and how you’re going to pay for them.

7. Make it a Team Conversation
Budgeting is a collaborative process, and ROI isn’t always clear, so when creating the budget, ask difficult questions with your team to discover insights for the best budget. This is the best way to get team buy in as well versus imposing a budget that may not have taken certain parts of the business into consideration. Here are some questions we like to ask:

• Does this budget and forecast align with our company culture and core values?
• Is there another solution that provides more value to our customers, our vendors or our employees, even if it is more expensive for our company?
• Is there something more cost effective that provides the same value?
• Is the timing right to do this now?
• Do we really need to make this expenditure at all?
• What is the worst that could happen?

8. Forecast Revenue
Forecasting revenue is about understanding the levers that grow revenue. This is every dollar you bring in for selling a service or product. Forecasting revenue is tough because you’re assuming the unknown. Start with last year’s revenue and estimate growth by percentage. If you have several years revenue, you can look at the previous years’ growth percentages and forecast growth on that average. Look at the actions that led to revenue increases. Was it a certain type of advertising? A time of year when business boomed or dipped? Was it a certain service or product? This will help you identify levers you can pull to boost growth.

9. And Project Expenses
Projecting expenses is an opportunity to analyze your margins and how to reduce expenses while growing or keeping revenue levels the same, which increases profit either way. Projecting expenses is easier than forecasting growth because many of your costs are fixed, such as rent and utilities, and will grow according to growth. For example if you project 20% growth in revenue, it’s likely that your merchant fees will grow 20% as well. This is a good time to analyze your vendors to see if there are cost effective alternatives that will increase margins.

10. But Be Wary of History Data
While past data is an excellent resource when planning your budget and forecast, also be aware of market trends in your industry and the economy as a whole. Though this why we suggest rolling budgets and forecasts, so you can adjust and realign as the year goes forward.  If you are forecasting 200% growth in a year where your industry may see a downtown, then you will need compelling data to justify the growth assumptions.