– as seen on Arlington Chamber of Commerce –
Why are business budgeting and forecasting important?
A well-organized, strategic budgeting and forecasting process ensures your organization is aware of and adhering to the reality of its cash flow while thoughtfully planning for the future.
Using the two distinct processes of budgeting and forecasting together allows you to understand your current financial position, see how projections compare to reality, and more accurately map out a healthy financial future for your business.
Tips for improving your business budgeting and forecasting
- Treat the process as a critical business function – just like any major business activity, there is a cost that comes with not taking enough action. Budgeting and forecasting lay the foundation for your organization’s fiscal health. As you would with other major business projects, it’s important to involve department leaders and/or managers in the process as they likely have invaluable insight on metrics and trends in the marketplace. Sharing information between teams and among business leaders can help establish more accurate budgets and forecasts.
- Leverage historical data – evaluating your past performance will help you set realistic growth projections in your business and forecasting process. While the past doesn’t automatically dictate the future, it can be a strong predictor of what to expect. It can also help you more clearly see trends and dips in your standard business cycle.
- Start with clean data – a forecast is a financial model that executes predictive budgeting given inputs from a budget. If the inputs are bad or incomplete, the forecast is bad. We advise starting your budgeting and forecasting after a timeframe that has been well reconciled. Creating a budget with outstanding P&L items or inaccurate payables/receivables can misinform your future projections charting a course for disaster.
- Make cash flow a top priority – the first, and most important, thing a business owner needs to know is whether his/her organization is generating positive cash flow. If your forecast shows that your organization is not generating cash to sustain the business in the short- or long-term, it’s time to address your expenses, working capital, or capital expenditure budgets.
- Create a “working budget” – consider your budget an active, ongoing process rather than a static “set in stone” document. Being flexible and continually reviewing your budget/making adjustments will help you see your business more strategically, mitigate risk, and capitalize on opportunities. Your budget should be updated as frequently as necessary to account for economic shifts, organizational changes, market trends, and other outside variables. Similarly with your forecast, it’s important to measure your actuals against your forecasts monthly to improve your budgeting and forecasting skills.
- Look into the future – unpredictable situations can interrupt the regular business cycle (see our last point about being flexible with the process). In a volatile economy like the one we’re experiencing now as the result of COVID-19, changes in resource levels, access to supplies, and market fluctuations are certain to happen. A future-thinking budget and forecast take into account performance under “what-if” scenarios. Balancing your business’ historical data with potential positive and negative shifts in the external market will help set more realistic metrics to prepare your business for the unknown.
- Automate where possible – consider using Cloud-based accounting software, such as Quickbooks Online, that can integrate with other business applications rather than relying on basic spreadsheets to manage your organization’s budgeting and forecasting. More sophisticated accounting tools can increase efficiency by generating automatic reports and producing preliminary forecasts that are more accurate. Investing in the right technology will give you access to more data and projection tools than standalone spreadsheets.
Budgeting and forecasting is a competitive business function
Forward-thinking entrepreneurs understand that investing time and effort in generating business budgets and forecasts is necessary to compete in an ever-shifting marketplace. If we can be of assistance with your Business Budgeting & Forecasting, please reach out using the GET A FREE CONSULT button below.
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