Why Businesses Need Annual Budgets And Forecasts To Supercharge Their Growth
Budgets and forecasts are the business equivalent of Satnavs. If you don’t know what to aim for and what your goals are it will be impossible to reach your end destination.
Preparing these documents can help businesses plan for how much cash they will need for the year ahead, alongside enabling them to set targets related to their future growth and expansion.
What Is The Difference Between A Budget And A Forecast?
Budgets are used by businesses to estimate their future performance over a fixed period of time. Whilst their name suggests they just include outgoings, budgets include revenues as well as expenses.
Correspondingly, a forecast is also forward-looking but will partly be informed by actual performance to date over the fixed period being measured.
Budgets tend to be more speculative, with forecasts being more reflective of realistic and expected outcomes based on what has happened so far.
To put this into context, let’s consider a business with a fiscal year ending in December.
A budget for the 12 month period would be created before January, with future iterations of the projections (i.e. created in March, June, September) being forecasts.
How Often Should They Be Created?
Budgets are normally created once per fiscal year, prior to it starting.
The frequency of forecasts will very much be based on the specific needs of the business. If a business has little cash left in the bank they may choose to make this a monthly process due to the sensitivity of their performance.
Alternatively, some companies reforecast every three months to take into account the performance over the previous quarter.
Should Budgets And Forecasts Be Presented As Cash Flows Or Profit And Loss Statements?
Budgets and forecasts can take the form of profit and loss statements or cash flows.
Profit and loss statements measure the actual activity related to revenues and expenses, irrespective of whether the related cash receipts and expense payments were physically received and paid in the same month to which they relate.
Cash flows measure the activity of the business purely based on the cash paid and received within the relevant monthly period.
High growth companies seeking to grow by building up their revenues and market share are likely to place greater focus on producing their forward-looking financial projections in cash terms. This is due to the profile of these companies having a very sensitive cash position. They need to be able to spot in advance when they will require new funding.
Established businesses are likely to create projections in the form of both cash flows and profit and loss statements.
How Should They Be Used In Monthly Financial Reports?
It is good practice to incorporate budgets and forecasts within monthly financial reports. Measuring monthly forecast activity to monthly actuals can identify variances, which can then be examined and explained by relevant internal stakeholders.
These differences can then be used to inform a more accurate reforecast, with new iterations being tweaked to be in line with actual activity from earlier in the year.
A time efficient way to measure forward-looking data to actuals is to use cloud accounting software to upload your budget or forecast. This is less fiddly than making comparisons in Excel, and will also reduce the likelihood of manual errors.
Who In The Business Should Use Them?
Budgets and forecasts should be used and consulted by senior management, and in particular anyone who takes ownership over a particular area of the business.
For example, the heads of sales and marketing may be tasked with creating their own, which then feed into the main company document. They may use these to set targets to members of the team which they manage.
Assistance with Budgets and Forecasts
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