Planning, budgeting and forecasting

Its importance is even more relevant in today’s business environment where disruptive competitors are entering even the most tradition-bound industries. Many businesses still base their strategy on annual plans and budgets, which is a management technique developed over a century ago. But in today’s more competitive environment, organizations are realizing that plans, budgets and forecasts need to reflect current reality — not the reality of two, three or more quarters ago. Continuous planning and rolling forecasts are becoming widely used methodologies to update plans, budgets and forecasts frequently throughout the year, on a quarterly or even monthly basis. These approaches help managers spot trends before their competitors — helping them make better informed, more agile decisions about pricing, product mix, capital allocations and even staffing levels.

Most Budgets are created on an annual basis, therefore revenue and expense expectations are typically annualized. This does not take into account the cyclical nature of most revenue and expenses. The budget forecast forms the basis for variance analysis, where actual outcomes are measured against the forecasted budget amounts. They keep companies on track by laying out spending parameters and allowing for the comparison of anticipated results to actual ones. By providing targets, they give businesses goals to aim for and a framework for meeting them responsibly. A budget estimates how much money your business will earn and how much it’ll spend over a specific period.

What’s the Difference Between a Cash Flow Statement and a Cash Flow Forecast

A plan serves as the foundation, a budget guides how to allocate cash, and a forecast projects the financial future of the business. Hence, while the budget provides management insight into what they want the company to attain, the forecast shows whether it can achieve its budget. Forecasting sales and expenses from past performance or peer performance guides developing an effective budget. Moreover, comparing a budgeted summary inventory shrinkage in retail with the most recent forecast helps management make necessary amendments to address changing business conditions and formulate more reasonable budgets in subsequent years. A budget is made for a specific period and is usually based on past trends or experiences of the company. A financial forecast examines a company’s current financial situation and uses the information to forecast whether or not a budget will be met.

Typically business are concerned about the overall spending and the timing, so, in most cases, its likely beneficial to create both a budget and a cash flow forecast. A budget can help you plan your finances for the upcoming year, while a cash flow forecast can help you manage the timing of cash flows and plan for different scenarios. A budget helps businesses set financial goals and track their progress towards those goals. It also helps them make informed decisions about where to invest their resources, which can help them grow their business and increase their profitability. Some businesses will also create detailed revenue budgets, developing detailed budgets for the sales of specific products and services. This is very different than a revenue forecast that focuses on the big picture and doesn’t get into the granular details.

Budgeting

A forecast can be seen as the assessment and interpretation of likely future circumstances related to the operations of the enterprise. For example, if you overspent on travel, you could consider reducing the budget for marketing. At SYTP, we review and update our clients’ budgets on the 1st of the year and after June 30th. As you begin to understand and proactively manage your firm’s financial health, both tools can and should be used. The proper way is to have one support the other, not substitute one for the other.

Forecasting in business refers to the process of making predictions or estimations about future business outcomes, trends, and events based on available data, such as historical context. It involves analyzing past and present information to make informed projections about future performance. Financial forecasts, on the other hand, can be used for various periods (annually, quarterly, monthly) and are updated regularly. Budgets are set at the beginning of the year to put forth the ideal direction of the company.

Differences

You can use financial forecasting software to automatically roll those assumptions forward period over period. Differentiating between forecast vs. projection can be tricky since the terms seem similar at first glance. However, you prepare forecasts based on what you expect to happen in the future. On the other hand, you use projections for what-if scenario analysis, so estimates change under each scenario. Budgeting, planning and forecasting software can be purchased as an off-the-shelf solution or as part of a larger integrated corporate performance management (CPM) solution. In a normal forecast, historical data is used to make a prediction on the future based on given assumptions.

At its simplest, a budget lists fixed and variable expenses and determines how to allocate the money coming into the business. The budget outlines your business’s projected income, estimated expenses, and costs for day-to-day operations over a specific period. There are many benefits to budgeting, but the most important one is that it is a surefire way of assessing idea feasibility. At the end of the day, you want to focus on systems and tools that help your business grow. Create financial projections that meet your business needs, and then use them on a regular basis to measure your performance and adjust course as necessary.

budgeting, planning and forecasting (BP&F)

A forecast uses historical and current transactional data, along with industry and market information, to help determine how to allocate budgets for anticipated expenses for a future period of time. Forecasting increases the confidence of the management team to make important business decisions. A cash flow forecast is a financial plan that outlines the expected cash inflows and outflows for a given period (usually a month, quarter or year). Unlike a budget, which looks at income and expenses over a year, a cash flow forecast focuses on the timing of cash flows, such as when payments are due and when income is expected to be received. These tools can enhance decision-making and provide valuable insights into your business’s financial future. You’ll soon find you can prepare your budgets and forecasts all in one place – without the mess of spreadsheets!

If that sounds interesting, get a personalized demo and see how you can have more control over your business’s finances. These dashboards present information visually, letting you make smart decisions through better insights into your financial efficiency and other metrics. A comprehensive solution that provides power and flexibility for streamlined, best-practice financial consolidation and reporting. Changes in the forecast do not impact performance-based compensation paid to employees. The goal is to earn more revenue than you budgeted for and never to exceed your expense budget. Setting and sticking to a budget is a great way to make sure that your team is always investing in the things you’ve decided will make you successful and make real progress to that goal.

What’s the difference between a budget and a cash flow forecast?

The forecast may be used for short-term operational considerations, such as adjustments to staffing, inventory levels, and the production plan. There is typically no estimate for the monetary position, but revenue may be forecasted. If you’re looking for more guidance on how to manage your business with regular financial reviews, check out our guide on how to run a monthly review meeting. If you’re like most business owners, you have very limited time and need to make sure that you’re investing your time in the things that will have the biggest impact on your business.

Because of this, many businesses update their forecast data periodically, such as quarterly or biannually. It’s considered a best practice to build a rolling (ongoing) forecast to make these adjustments in real-time. While a company’s plan, budget, and financial forecast are often discussed in the boardroom, these terms’ functions are not always precise. Financial forecasting can help a management team make adjustments to production and inventory levels. Additionally, a long-term forecast might help a company’s management team develop its business plan.