Budgeting and forecasting are an integral part of running a business, so formulating strategies to stay ahead of your finances is absolutely essential for the longevity of your company. Budgeting and forecasting allow your business to accurately strategize for its fiscal year. While the terms generally go hand-in-hand, there are some key differences between the two of them.
Budgeting is the process of strategizing your business’s revenue and expense numbers for a specific time period. It requires your company to identify available liquitable cash and allocate financial resources for your business’s allotted spending.
Forecasting is the process of using data analytics to track historical trends for the purpose of predicting future financial results based on your company’s most current reports. Completed throughout a shortened period of time, forecasting generally focuses on major expenses and revenue items.
Together, budgeting and forecasting will help your business align its goals and get set up for success.
Why it’s important to stay on top of your business’s budgeting and forecasting
“Staying on top of your businesses budgeting and forecasting is essential to the overall health of your business. Being able to see data across departments is pivotal and gives insights from sales, to marketing, to purchasing, that gives a real-time, full view of your company’s performance.”
As mentioned previously, budgeting and forecasting set your business up for success by allowing you to accurately strategize your finances for its fiscal year. Budgeting often starts from the bottom up, making many important cross-functional stakeholders involved in the process. This instills a sense of shared responsibility throughout the company and motivates employees to stay within their budgeted goal. Budgeting clarifies when and where financial resources are essential allowing you to allocate them accordingly and responsibly to keep the business going in the right direction.
Using data analytics, forecasting reveals trends that help you respond to financially harmful situations before they occur. Forecasting makes it easier to manage cash flows and capital requirements because it provides you with data-driven predictions of where future expenses will evidently fluctuate. Forecasting also allows your employees, especially managers, to focus their attention where the data is needed. This is crucial for the short term financial success of the company and sets your company on the right track for the long term.
Dave Boorman, CFO of Phocas Software, stresses the importance of budgeting and forecasting by saying, “Staying on top of your businesses budgeting and forecasting is essential to the overall health of your business. Being able to see data across departments is pivotal and gives insights from sales, to marketing, to purchasing, that gives a real-time, full view of your company’s performance.” These insights allow your business to exploit business opportunities and solve any of your financial difficulties.
The next section will describe the top 10 ways to enhance your business’s budgeting and forecasting to push your company in the right direction towards financial success.
Top 10 ways to improve your business’s budgeting and forecasting…
1. Be flexible with your business’s budgeting and forecasting
“Flexibility is akin to conducting healthy economics for your company as a CFO”.
Gisera Matanda, General Manager of WeLoans
While it’s nice to use software and data to predict your company’s finances, it’s crucial to adapt and be flexible to any changes in the software’s budgeting and forecasting predictions. Things are bound to differ from your budgets and forecasts throughout the year, so you need to be able to adapt to the changes and how they will impact your business. Basing all of your actions on predictions can lead to costly mistakes.
Gisera Matanda, the General Manager of WeLoans, claims that, “Flexibility is akin to conducting healthy economics for your company as a CFO”. Building flexibility into your budgeting and forecasting will maintain the healthy economics in your company and develop better financial results for your business
2. Implement rolling forecasts and budgets
“You are in a better position to react to time-sensitive actions when you use rolling forecasts because they enable you to modify the prediction to consider the latest changes or trends. Because your perspective is continuously being updated, you will always have access to long-term data in the event that your firm has to make a significant choice regarding its business”.
Rolling budgeting and forecasting is when the process of budgeting and forecasting is updated at set periods. This could be done quarterly, monthly, or even weekly and should be communicated with your team properly to promote accurate budgets and forecasts.
Jeff Mains, CEO of Champion Leadership Group LLC, states, “You are in a better position to react to time-sensitive actions when you use rolling forecasts because they enable you to modify the prediction to consider the latest changes or trends. Because your perspective is continuously being updated, you will always have access to long-term data in the event that your firm has to make a significant choice regarding its business”.
3. Budget to your plan
While it’s crucial to be flexible, it’s still important to have a set plan and budget to the plan. Budgeting to the set plan requires that your spending decisions should be based on actual revenue and cash flow, rather than on potential opportunities that spending might lead to.
Rather than blindly spending and figuring out your finances in the future, budgeting to your set plan forces you to deal with the potential impact, positive or negative, any investments will have on your company.
4. Be clear and consistent with your communication
Because budgeting and forecasting involves every aspect of your business, you will want to openly communicate with all the departments throughout your organization and during the entire process to help mitigate any mistakes. This instills a sense of responsibility between teams by aligning the organization’s strategies and goals with each of the departments individually.
5. Include your entire team in the process
Including your entire team in the process of budgeting and forecasting is similar to the previous section, but requires that you continuously involve your team by developing plans on a quarterly, monthly, or weekly basis. Utilizing your entire team gives you a multitude of expertise perspectives when looking at the budgeting and forecasting for your organization. Each team within your company has their specialties, and including every team on a consistent basis will allow you to stay ahead of your company’s finances.
6. Be clear about your short-term and long-term goals
The main goal of budgeting and forecasting is to predict and guide your company to a positive financial future. You need to set clear, achievable goals for your employees in order to accurately budget and forecast your business’s financial future. You should have expert individuals working in your company to have a clear understanding of what is driving your budgeting and forecasting predictions. Without these trained individuals, your company’s predictions will just be random and not in the realistic goals of the company.