Once your business is operational, it’s essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business – and its finances – on track and one of the stress-free ways to get a business where it wants to go is to create a budget forecast.
When you’re running a business, it’s easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.
WHAT IS BUDGET FORECASTING?
The purpose of the financial forecast is to evaluate current and future fiscal conditions to guide policy and programmatic decisions. A financial forecast is a fiscal management tool that presents estimated information based on past, current, and projected financial conditions. This will help identify future revenue and expenditure trends that may have an immediate or long-term influence on government policies, strategic goals, or community services.
The forecast is an integral part of the annual budget process. An effective forecast allows for improved decision-making in maintaining fiscal discipline and delivering essential community services.
BENEFITS OF BUDGET FORECASTING:
- a greater ability to make continuous improvements and anticipate problems
- sound financial information on which to base decisions
- improved clarity and focus
- a greater confidence in your decision-making
- manage your money effectively
- allocate appropriate resources to projects
- monitor performance
- meet your objectives
- improve decision-making
- identify problems before they occur – such as the need to raise finance or cash flow difficulties
- plan for the future
- increase staff motivation
WHY YOU SHOULD CREATE BUDGET FORECASTS
Creating a budget forecast allows businesses to estimate how much money they will be able to save for important things like new company vehicles or company renovations. Using a realistic budget to estimate company expenses for the year can really help businesses with long term financial planning.
Once you have built your first budget, begin to use it and get a good perception for how it can keep business finances on track, businesses may want to map out an expenditure plan or budget for 6 months or more. By doing this you can easily forecast which months your finances may be tight and which ones you’ll have extra money.
CREATES FINANCIAL ROAD MAP
Budgets often allow companies to have a financial road map for business operations. Many companies review previous year’s budgets to determine how well they followed the guidelines and why budget variances occurred. Not all budget variances may indicate a negative business situation. If budget variances occurred due to unexpected growth in sales revenue, companies may need to increase the budget amounts for future sales increases.
Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.
A TYPICAL BUSINESS PLANNING CYCLE
- Review your current performance against last year/current year targets.
- Work out your opportunities and threats.
- Analyse your successes and failures during the previous year.
- Look at your key objectives for the coming year and change or re-establish your longer-term planning.
- Identify and refine the resource implications of your review and build a budget.
- Define the new financial year’s profit-and-loss and balance-sheet targets.
- Conclude the plan.
- Review it regularly – for example, on a monthly basis – by monitoring performance, reviewing progress and achieving objectives.
- Go back to 1.
PLAN FOR FUTURE GROWTH
Companies often use budgets to plan for future business growth and expansion. Capital saved on regular business expenditures may be placed into a special reserve account designated for selecting new business opportunities. Budgeting for future growth opportunities ensures that companies have capital on hand when needing to make a quick decisions for expanding business operations. This capital may also be used during slow economic times as a safety net for paying regular business expenses
To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.
Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.