Introduction to Budgeting and Forecasting
Budgeting and forecasting are lengthy processes on their own. Budgeting season is one of the dreaded seasons among analysts. Why? Due to the amount of data, research, analysis, a number of simulations, and decisions to make. It usually takes months in big corporations.
Budget vs Forecast
A budget is different from a forecast. They represent different factors and provide different views. How is that so? A budget quantifies your tactical plan. The expected revenues and expenditure are presented in a detailed statement. It represents your high-level action plans like launches, expected service bookings, and expenses.
On the one hand, the forecast is more strategic. It is the projection of financial trends and outcomes based on historical data. You can create various scenarios on how to achieve your strategic growth plan.
A budget is usually prepared for a specific period. Usually, one financial year while a forecast can extend beyond one financial year and go as far as 5 years. Most big corporations prepare 5-year projections, especially when it involves Capital Expenditure (CapEx). Or when planning for a totally new product offering. An example of CapEx is plant expansion.
A budget is more static than a financial forecast. Meaning whatever you budget before the start of the budgeted period, that stays as is. Forecast changes depending on factors that directly or indirectly impacts the business.
Budget and Forecast Simplified
In simple terms, a budget is your desired monetary goal for the year. It is how you achieve that goal (revenue) and what it takes to achieve that goal (expenses). For instance, your goal is to achieve $100,000 profit for the year. Part of your budget comprises the number of bookings. It can be the volume of products you need to sell or the total number of sign-ups you need for your course offering. The other part is your expenses directly and indirectly needed to sell that volume.
Forecasting is more detailed and requires more information. It is strategic rather than tactical. In simple terms, it is your desired goal plus your what-ifs plus external factors. It quantifies the impact of your what-if scenarios. Like unplanned product offerings or new service. It also includes consideration of external factors like changes with the tax rules.
This is especially relevant now with the new normal due to Covid-19. In your forecast, you adjust your calculations to capture the changes you implemented. It may or may not be the same as your budget but definitely different.
Importance of Budgeting
How do you know if your business performed well? Is it only through the evidence of cash coming in or getting many bookings? Sorry to say, but it is NOT. Getting 20 bookings at $300 each does not necessarily equate to a healthy business.
You have to consider your expenses and other consumed resources to get those 20 bookings. Resulting in a positive net profit does not mean good performance, as well.
a. Baseline for comparison
That’s where a budget comes in. It serves as a baseline to compare your actual performance with. A budget is usually finalized before the start of the budgeted period so you use it as your gauge. You can assess whether your vision is achievable and how your business would perform.
Ideally, do a comparison of your actual performance against your budget monthly. Do it on the first week of every month following the close of the monthly accounting cycle. Make sure though that all your revenues and expenses have been properly recorded.
b. Helps you stay on track with your plan
Your budget also helps you stay on track with your plan. Moreover, for this to work as such, prepare your budget according to your plan. For instance, your plan is to launch a course in July. Your projected revenue for July is higher than the other months with no launches. Learn how to create your sales budget here.
Expense estimates are higher too because of push marketing. Then on the months before the launch, expenses slowly build up as you create hype for your launch. While it’s the opposite for your revenue.
Creating your budget forces you to carefully plan your purchases and estimate expenses. Somehow, you restrict yourself from making nonessential unplanned expenses. Learn how to create your cost of goods sold here and operating expense budget here.
c. Allows you to adjust your high-level action plans
Another beauty of creating a budget is how to interpret the data. If unsatisfied with the result of your initial budget, you can adjust your activities. For instance, your desired goal is $100,000 net profit. Convert your action plan into estimates of revenue and expenses.
You can tell right away if you would come up short of your desired goal. You then review your expenses and see where you can cut. The final budget should reflect your final sales and marketing strategies.
Another way is to drive your income-generating activities with more intensive marketing strategy. That also comes at a cost but match it with higher, achievable sales volume projection. You can also review your pricing strategy. Consider increasing your pricing while adding more value to justify your price increase. You’ll likely be surprised at a less unsatisfactory result if you go ahead without a budget.
d. Drives more value into your business
What I like the most about budgeting is how it influences your decisions. With regard to marketing strategy, messaging, and actions. Increasing your prices prompt you to drive more value into your business. Such a good way to establish your authority and expand your fanbase. Thereby, building a more collaborative community. It’s a BIG WIN for your business.
Importance of Forecasting
The basis of financial forecast are business drivers, historical data, and assumptions. These can be the impact of situational factors on the business. It is also the estimation of where the company is going. A forecast changes and is adjusted based on the current situation of the business.
a. Helps you plan your business’ growth
You can assess how to meet your strategic growth plan based on various scenarios. A budget is your expected scenario while your forecast is like your dream scenario. You can reflect your aggressive plan to assess its potential impact on the business. For instance, calculate impact of adding a membership program to your business’ profitability.
Through this process, you can be strategic with your decisions. Identify what plans to push through and what needs more planning. It allows you to find out where to focus your energy on. Instead of throwing activities out there and hope it will bring positive results.
Learn how to do financial forecasting here.
b. Helps you determine your course of action on times of uncertainty
The Covid-19 unexpectedly handicapped businesses worldwide. This is something that was not factored into the budget since no one expected this to happen. With the help of forecasting, you can come up with an alternative action plan to somehow lessen the impact to the business.
For instance, a recent situation affected negatively the result of your business. Financial forecasting helps you quantify alternative actions. Then assess which would bring better results. E.g. You can simulate the impact of re-launching the course after a few months.
Reflect the changes to your budget by moving the income projection to the re-launch month. I read a lot about pivoting during the first few weeks of worldwide quarantine. Financial forecasting helps you assess if that’s actually beneficial with regard to profitability. Of course, the community-building impact is one of the qualitative results.
c. Helps your business stay healthy in a changing economic environment
Forecasting does not only apply to revenue and expense. It also applies to your cash flow and more. Forecasting is not only about planning for growth. You can also forecast the worst-case scenario. Like when some opportunities don’t materialize or happen slower than expected. Allowing you to continuously adjust your actions. That way, you can arrive at the best possible scenario.
Budgeting and Forecasting for Online Entrepreneurs
Doing business online has more uncertainty than a brick-and-mortar business. That is why marketing is critical for an online business. An online entrepreneur can lessen the uncertainties through budgeting and forecasting. It is equally critical for a business owner to understand the numbers behind the plan.
- Financial clarity lets you as the business owner have full control of your business.
- Knowing where you stand financially at any given time gives you more confidence. Especially in making critical decisions and adjustments.
- Knowing the following allows you to redirect your business to the right path. a. How much your business is actually making. b. Where the chunk of profit is coming from. c. where you incur most losses.
- Planning for future growth is easier when referring to real numbers than imaginary ones. Seeing your plans in action is even much better than continuously playing them on your head.
- Be prepared for unexpected events. Forecasting allows you to consider various scenarios affecting your business. Providing a better view of your business’ profitability.
Introduction to Budgeting and Forecasting
What’s the difference between budget and forecast? Why do you need a budget and a forecast? When to do a budget and a forecast?