Only in the last hundred years have planning, budgeting and forecasting evolved to the form we see them today. However, these processes took centuries to develop. As early as the 15th century, Venetian investors used double-entry bookkeeping, income statements, and balance sheets to oversee and manage their trade with Asia.
The British government has the credit for making the term budget popular, which is derived from the French word bougette.
However, it was only around 1930, when the world was trying to get back on its feet after the devastation of the great depression, that businesses realized the crucial role of strategic planning, budgeting, and forecasting.
Today, although not all small businesses approach planning, budgeting and forecasting strategically, they do conduct them in some way or other.
For example, when you launch a product or service or tweak your existing products, you’ll create a rough plan to estimate the costs and profit you will earn, among other things.
These are some examples of planning, budgeting, and forecasting a small business engages in.
However, it is important to carry out planning, budgeting, and forecasting systematically to get the best results and enhance business operations.
Without that, you’d have a reduced return on investment (ROI), profitability, and business growth.
In this blog, we will look at the best practices for planning, budgeting, and forecasting in detail. However, before we get started with that, let us know what planning, budgeting and forecasting are and if there are and major differences between them.
What are Planning, Budgeting and Forecasting?
While planning and forecasting focus on strategies, budgeting is more concerned with the financial aspects of the process. To get to the bottom of that, let us know what planning, budgeting and forecasting are.
Planning entails defining the direction the business will take in the near and distant future. Planning has the utmost significance in any business operation, such as laying out the accounting system, strategizing, management, expansion, or a merger.
Budgeting creates a financial plan for the process and estimates the costs of running it. Moreover, the budget sets a spending limit for the financial period and outlines the revenue the business expects to earn during the process.
The budget sets a financial goal in line with the company’s objectives that it intends to achieve.
Budgeting is essential because it supplies the management with these:
- Outlines of Fixed and variable expenses (for example, compensation and raise details)
- Different metrics you’ll use for evaluating the performance
- detailed pro forma financial statements, like income statements, cash flow statements, and balance sheets
- Capital expenditure timelines in case of large projects
Forecasting is concerned with leveraging historical data, market indicators, and economic conditions to predict the future of the business. It predicts the financial health of the company in the future, its revenue and net worth, and the success of various business operations.
Is Budgeting and Forecasting the Same?
There are a lot of similarities between planning, budgeting, and forecasting. These processes go hand in hand when you review and plan a business operation.
For example, when you wish to start a product line, you make a rough plan, estimate its budget, and forecast the profit.
This helps you evaluate the feasibility of the process and whether you should actually invest in the idea.
Once you realize that it makes sense to begin with the project, you can draft a comprehensive plan for it, estimate its budget, and forecast profits and risk, among other things.
Budgeting and Forecasting – Differences
While planning is sort of self-explanatory, the question is if budgeting and forecasting are the same thing.
Although, after reading the last section, it might have become evident that budgeting and forecasting are different, let us take a comparative approach to understanding the differences between them.
|Budgeting entails creating a financial outlay of the future direction of the company.
|Forecasting means predicting the direction of the company and whether it is headed in the right direction.
|It evaluates and assigns a quantity to the expectations of the management and business owner in the time period.
|It estimates the revenue the company would be earning in a time period and what the income would be in that period.
|Budgeting prepares a detailed outline of how the plan would be carried out every month and the resources that would be spent in that time and revenue earned.
|Forecasting uses statistics, historical data, and market indicators and leverages financial technology to predict things like income and risks.
|It creates a standard to compare how the actual performance varies from what is expected.
|Financial forecasting helps a company define its budget and spend on different projects.
Tips for Effective Planning, Budgeting and Forecasting
If you are beginning with the planning, budgeting and forecasting for your business, or want to learn how to do it effectively, you are at the right place. Go through these best practices and tips listed below to ensure you draft an effective plan with the help of tools like budgeting and forecasting.
1. Start with a Realistic Budget
It is important to save money and ensure higher efficiency, minimum loss, and expenses. However, that is for planning and execution of the business operation and not budgeting.
Once you draft a plan for a project, you should make a realistic budget that takes into consideration the various risks and probable losses.
It is a very tight budget that is not practical but idealistic will prove very hard to achieve. Therefore, such a budget would not be useful.
For instance, you cannot expect to cut your expenses by half or more unless you have devised a groundbreaking idea or technology to achieve that.
If you start with such a budget, it would only leave you with no choice but to provide more money to the project in the third or fourth quarter of the financial period.
2. Ensure Your Data is Reliable
Budgeting does use statistics to predict costs and revenue, among other financial figures. Therefore, it involves an in-depth business and data analysis. However, everything can go wrong if you rely on incorrect data.
For instance, let’s say you used data for accounts receivable or payable that were inaccurate. It will hamper both your budget and forecast. For planning, budgeting and forecasting, you must begin with reliable data from a credible source.
3. Consider Probable Scenarios
Local and international markets and national and global economies are meant to change, gradually or drastically. Therefore, although budgeting and forecasting take risks and economic changes into consideration, many companies fail to consider different scenarios.
Sudden market interruptions like what we have seen during the COVID-19 pandemic and then geopolitical issues like the Russian-Ukrainian war can bring drastic changes to the economy.
This disrupts demand and supply at many levels, promptly changes the market indicators, and wreaks havoc on one or many industries in a short amount of time.
Therefore, one of the best practices for planning, budgeting, and forecasting is to consider these scenarios and plan for them as well.
4. Plan for both Short and Long-Term
Companies and governments usually conduct budgeting and forecasting for the financial year and also for the quarters and plan accordingly.
However, with detailed long-term budgeting and forecasting, one should also utilize budgeting and forecasting to plan in the short term.
This gives a more detailed idea of how the resources would be spent and directs the business operations.
This also ensures the businesses maintain sufficient cash balance and do not delay or affect the business operations. This helps in seamless business operations and consequently aids in the timely generation of revenue, cash flow, and financial health of the company.
5. Monitor Budget with Time
Let’s say the budget you began with did or didn’t include a detailed outline for different months. In either case, there would be some or large variance from the cost and revenue you predicted, and this would require you to tweak your budget for the coming months.
For example, if you managed to spend less and earn more than you expected, you can probably spend more in the coming months.
However, there are other factors to consider, such as seasonal changes in the market, market trends, and whether you wish to invest the profit you earned now or in a different project.
If the company’s performance and revenue are not on par with your expectations in the initial budget, you need to figure out how to improve things in the upcoming months.
6. Update Forecasts Regularly
Both budgeting and forecasting need proper monitoring, review, and update. Forecasts change with the passing of time and changing market indicators.
With any change in market conditions, you must update the forecast to predict accurate revenue, costs, company direction, etc.
In case there is a drastic change in the market, the forecast will change abruptly. Therefore, one needs to stay updated with international, regional and local factors for accurate forecasting.
Let an Expert Take Care of BP&F
The above article shall get you started with planning, budgeting, and forecasting and help you oversee the same as the management.
However, for conducting accurate planning, budgeting and forecasting, you need a financial professional who is an expert in various domains like accounting and finance and understands the economy and market behavior well.
However, hiring an expert can be costly, so we offer outsourced planning, budgeting and forecasting. Consequently, you can skip the expensive cost of hiring an expert or the hustle of finding one.
Take a free trial of our outsourced accounting and financial planning services and continue working with us only when you think right. Dial +1(800) 580-5375 now and connect to our financial advisor.