The Art of forecasting & budgeting

Budgeting and financial forecasting are financial planning techniques that help business managers in the decision-making process. Traditional definitions suggest there is a difference between the two. One definition is that “a budget represents a business’ financial position, cash flows and goals”. It defines a forecast as « an estimates of a company’s future financial outcomes based on a set of important criteria”. Our position is that they are actually two sides of the same coin. For ease of description we will refer to them as a forecast.

Most companies have a business plan in varying forms of sophistication and use. In order for any business to function it requires a plan that details its goals for sales, expenses and profits. Funding, whether by personal capital investment, financial loans or some combination of the two is required to drive this plan.

No matter what the source of funding, a return on investment is what will drive it. Forecasting will enable the businessman to do two things. First, it is required in order to make the initial determination to fund the venture. If you are going to invest your money in an enterprise, or hope to attract some form of outside investment, you must be able to provide some credible evidence that your money, or your investor’s, will not only be safe, but also return sufficient profit to make it an better investment than simply putting it into a savings account or some other form of safe money instrument. Second, as a business manager or investor, you want to have a reliable tool for comparative reporting to enable measurement of the success to the business plan to. This will enable management to make on-going adjustments to the company’s plan to stay on target or improve on it. It will also provide information to investors for them to decide if they want to continue to fund this enterprise. Regardless of the use of the forecast, it can only be useful if it is timely and accurate and used to optimize the performance of the company.

First to accuracy. A forecast needs to be a representation of the company’s business plan. It will be a combination of historical data, current results and future expectations. It must be developed by people with intimate knowledge of the operation, its business strategy and ongoing plans for the future. By definition a forecast is a look into the future to reflect the company’s estimate of future profits. Historically, the more often a forecast is reviewed and adjusted the more reliable it will be as those responsible for creating it gain experience at recognizing trends and their effect on the business’ performance. Comparison to actual results on a regular basis in the shortest delay possible will allow management to make adjustments to the plan to maximize performance and ultimate profitability.

To sum up, whether you call it a budget or a forecast, it is an essential tool in a manager’s arsenal to help drive business performance and maximize profitability. Our decades of experience in developing and using this tool can enhance your forecasting environment or improve the value of the one you already have.