Budgeting and forecasting allow a business to plan accurately for its financial year. Below are 10 ways to improve these processes to create a strategic plan that meets your business’s financial goals.
1. Keep Budgeting and Forecasting Flexible
Rigid forecasts and budgets aren’t very useful. Things change as the year progresses, and you need to be able to factor in those changes and how they will affect your business. Continuing to base decisions on the best guesses made months prior can lead to faulty and costly decisions. In addition, holding employees to metrics based on out-of-date information is counterproductive and frustrating. Building flexibility into your budgeting and forecasting will allow for more accuracy and better results in your business.
2. Implement Rolling Forecasts and Budgets
You can update rolling forecasts and budgets based on present results, not on what a manager thought may happen several months ago. With this process, forecasting is done for the next quarter and not the entire year. Each quarter the forecasts are broader since they too will be updated again. Rolling forecasts allow you to better align your budget with your stated plan while improving the accuracy of your projections.
3.Budget to Your Plan
Have a plan in place and meld your budget to it. Budgeting to your plan “requires that spending decisions be made based on actual revenue, rather than on opportunities that such spending might (or might not) lead to.” Instead of spending and dealing with it later, budgeting to your plan forces you to deal with the potential impact any expenditures will have on the business. Implementing this method of handling your budget is really helpful in addressing opportunities that weren’t a part of the original budget.
4. Communicate Early and Often
As the forecasting and budgeting affects all aspects of the business, you want to keep an open line of communication with all departments throughout the entire process to help minimize issues and to ensure alignment between your company’s operational and organizational strategies.
5. Involve Your Entire Team
Budgeting and forecasting should be a team effort so that departments and units have a clearer understanding of their needs. As well as the people in your finance department, having people with their pulse on the various departments can give you the data you need to make accurate predictions and set realistic budgets. Moreover, using your entire team allows you to have multiple perspectives on where your business is now and where it could be in the future.
6. Be Clear About Your Goals
The purpose of forecasting is to predict your company’s financial future. Forecasting aids in the making of business decisions and in understanding their impact before you implement them. If you aren’t clear on the overall goals of the company, then your ability to accurately forecast your business’s financial future falters. Therefore, you should have a clear understanding of what’s driving your forecasting predictions; otherwise, they are just random guesses not grounded in the goals of your company.
7. Plan for Various Scenarios
You can’t plan for everything, but you can have an idea of some of the obstacles that could affect your initial forecast and budget. Review external market and economic trends that may negatively impact your company. A rolling forecast is helpful for staying on top of any changes, negative or positive, that could have a serious impact on your business. Rolling forecasts also allow you to pivot as needed based on any new data presented so all decisions are based on what’s happening now and not on what happened the previous year.
8. Track Everything
Everything needs to be accounted for when budgeting and forecasting for the upcoming fiscal year, whether it’s the potential buyout of a competitor or just of the office supplies. Don’t underestimate the importance of seemingly minor details and their ability to affect the company’s financial health. Once a budget is in place, allow for forecasting that looks at the many potential scenarios that may occur. Keep eyes and ears on market trends, client behaviors, and what the competition is up to as the business forecast is being finalized.
9. Include Profit and Cash Flow Goals
Every budget should have profit targets and cash flow targets because the two bottom line measures are very different, and they require different kinds of attention to control them. If you’re not keeping track of these two important metrics of your business, how useful and accurate will your budget be? To keep your company from missing its financial goals, set realistic targets for both your cash and profit flow.
10. Let Excel Go
Don’t rely on Excel or other spreadsheet software to do your budgets and forecasts. Planning software can go a long way in making the process easier and less time consuming. Cloud-based systems have quickly become the standard for all areas of finance, not just bookkeeping services. When implemented, they allow for more flexibility, as well as better security and cost savings, than manual options. They allow you to generate accurate predictions and budgets quickly and with minimal errors.