Trust you’re blowing up your goals and smashing those targets. Today, we bring you an important but often overlooked business process and that is budgeting and forecasting!
Budgeting is an estimation of your proposed income and expenditure and forecasting is more of a projection.
Budgeting is done with more certainty and it is often on a short term basis.
Forecasting is for longer period and sometimes your targets/goals are reflected in your forecast.
For a forecast, you take macro factors which are outside your influence into consideration.
Often times, budgeting is misinterpreted to be only applicable to personal finance. However, it is actually applicable to business finance as well. It’s a good tool to keep track, monitor and be accountable.
Budgeting is an outline of your expected income and expenditure in a specific period. It is like your goal sheet in a short term period. And like every solid goal, it has its own rules:
So, what are these rules?
1. Specific: Your Budget lines and terms of reference should be well-defined. Giving a vague expectation or uncertain figures will defeat the purpose of budgeting.
2. Measurable: Your Budget should be tangible and should be comparable. You can design a template for your budget lines. For example, your re-occuring expense lines can be given a consistent label that allows you to easily compare it or measure against a similar period or your actuals.
3. Achievable: You are not trying to impress anyone with your budgets, you can practise stunts in your forecast but please be realistic and essentially learn to cut your coat according to your cloth. Don’t over estimate what your income will be most importantly.
4. Realistic: Similar to being achievable, just don’t lie to your business about your business. Make your expectations realistic.
5. Time-bound: You cannot carry over your budget. Once the period it’s set for elapses, then it’s time for a fresh budget.
A budget is only effective when it balances. That is, your inflow is equal to your outflow. Essentially, your income should cover expenses. It is advisable to have some liquidity in form of saving depending on the stage of your business.
I know some businesses have loans so no, I am not preaching no debt but budgeting can surely help you with efficiency and judge how good your perform in specified periods.
Lastly on budgets, don’t forget variances.
Founders, judge your performance against actuals .
What percentage variance do you have? 0-10% is excusable as things happen but once your variance starts to shoot up to 10%, then there should be in improved internal control measures.
In summary, forecasting is where you insert some of your goals. If your mission is to dominate at least 20% of the market in geographical area in the next two years, and assuming the total market size is 100, then you know that your forecast should not carry less than 20 as your target sales within that period.
Forecasting helps you to be strategic and focused more on how to ace your goal. It is a more thoughtful process than budgeting as many factors such as future consumer behaviour, government policies, pricing, economic factor, completion influence and others are considered.
Forecasting is a joint work of department heads especially sales and marketing for revenue.
A lot of small business consider budgeting and forecasting tedious and time-wasting but I think they are exercises that are worth the effort and should be practised by every business. You can outsource it along with your finance operations if it’s too distracting for you.
I hope with this few points, I have been able to convince you to start budgeting and forecasting as it helps you to be accountable and focused.