Budgeting and forecasting are essential financial tools that help businesses set and track their financial goals.
A budget is an estimate of your business’ income and expenditure for the year. A forecast is more fluid and takes into account our constantly changing environment.
Although budgeting and forecasting are often used together to give business owners a clear and accurate overview of their financial situation, they also serve two different and important roles within a business.
Before you set a budget for your business, think about what your goals are for that year. For example, are you a start-up business with a goal to break even by the end of the financial year? Or are you an established business that’s entering a period of growth?
Your budget needs to estimate the revenue and expenditure for the year. You’ll base your future numbers off what your business has experienced in the past and your goals. Remember, it’s okay to sprinkle in some ambition amongst your realistic targets!
Let’s use the example of a start-up swimwear business that’s set the goal of breaking even by the end of the financial year.
Based on previous years and consumer behaviour, revenue will increase during the summer months and decrease during the cooler months. These peaks and troughs in cashflow are taken into consideration when developing the budget.
The budget will guide the financial direction of the swimwear business and it’ll set the expectations of revenue and expenditure for the year as the business owners work towards their goal of breaking even.
It’s impossible to accurately predict what the year ahead will look like, which means the budget is almost always wrong. So how do you know if your company is heading in the right direction?
That’s where forecasting comes into play.
The forecast is based off actual data from previous months throughout the year. It’s reviewed every three months because a lot can change in a short amount of time. (Hello, Covid. Yes, we’re talking to you). These changes could be snap lockdowns, gaining or losing clients, staff movements or shipment delays.
Forecasting allows your business to:
- Accurately track and measure your progress toward the goals set in the budget
- Allows your business to be agile and respond responsibly to unexpected circumstances
Let’s go back to the example of the start-up swimwear business. Traditionally the business is run through a physical store in the main street. During lockdown, the store was forced to close its doors for good.
This is an event that their initial budget didn’t predict, but after reassessing their forecast they decided to transition to an online store.
The forecast allowed this business to move quickly and reallocate revenue and expenditure streams all while keeping on track with their big picture goals set out in the budget.
How do I track my budget & forecast?
Once you set a budget and forecast, you can migrate it all on to Xero’s accounting software.
Here you’ll have access to customised reports to help you measure your results against your budget and changing forecast throughout the year!
By reviewing your numbers regularly, you can see emerging patterns and tweak your business decisions accordingly as the year progresses.
Alternatively, your business may be going through a phase of growth, which means a lot of networking, entertainment and schmoozing potential clients. All those extra coffee dates are justified in the budget and forecast. But this extra spending in one area may mean less spending in another.
Budgets are your big picture goals, and your forecast is the micromanagement of that goal. They work in tandem with each other and with the right preparation, advice and systems in place, those seemingly far-fetched goals can become a reality.
If you’d like to talk more about the direction of your business, book in a call. We’d love nothing more than to help you set and achieve your business dreams!