Every business should engage in some form of budgeting or forecasting activities. Budgeting and forecasting assists in putting effective strategies in place, aligning with business goals and planning for the future. These processes are crucial to a companies growth and overall success and therefore should always be a top priority. So, why is it that too many businesses lack the fundamental understanding of budgeting and forecasting?

To avoid any confusion, misalignment or mis-guessing we have put together the following guide on financial forecasting and budgeting…

What is Financial Budgeting and Forecasting?

What is Budgeting?

Budgeting is the process of planning company revenue and expenses over a certain period of time. In order to determine company spending, this is where cash flows are identified and financial resources are allocated.

Moreover, an annual budget generally takes 3-6 months to complete and typically includes an income statement, balance sheet and cash flow statement.

What is Forecasting?

Forecasting is the process of predicting future business results through analysing historical trends and up-to-date actuals. Similar to budgeting, forecasting focuses on major revenues and expenses, however this is completed over a compressed time frame.

Furthermore, Forecasting is conducted end of month or end of quarter, after the release of financial statements.

Why is it Important?

The creation and implementation of a clear budgeting and forecasting process is crucial to creating accurate reports and analytics. Overall, this provides businesses with guidance on what to expect for the future. More specifically, these processes enhance strategic decision making, data-driven actions and ultimately, increase revenue growth.

Budgeting and forecasting allows a business to:

  1. Respond to threats and opportunities fast by easily being able to update plans and forecasts
  2. Identify risks early and rectify any issues become they become overly problematic
  3. Accurately manage sales pipelines through tracking performance against targeted figures
  4. Plan and predict cash flows more efficiently
  5. Increase company communication and collaboration
  6. Make confident strategic decisions based on set statistics
  7. Use projected figures to present evidence to potential investors

Overall, saving time, minimising errors and promoting collaboration.

What are the Common Pitfalls?

There are many different approaches to budgeting and forecasting, with each organisation having different processes in place. Moreover, no matter the company size, structure or industry, budget and forecast challenges can persist for any team.

Therefore, it is important to recognise some of the common pitfalls:

  • Disconnected Data Sources – making it difficult to analyse the story of the numbers. As a result, creating unreliable budgets and forecasts.
  • Lack of Data – making it difficult, if not impossible, to budget and forecast accurately.
  • Manual Excel Processes – can lead to version control issues, data integrity and formula errors.
  • Lack of Workflows, Audit Trails or Data Validation Measures – makes budgeting and forecasting stressful and time consuming.
  • Unrealistic Expectations – resulting in data cherry-picking and the lack of important information. Accordingly, this habit usually develops from wanting fast results and immediate growth.

Overall, these are just some of the many pitfalls involved with financial budgeting and forecasting. Find out more about how to manage these pitfalls here.

Are you experiencing any of these issues within your company processes? Contact BUSINESSNAV’s financial advisors today and navigate your business to growth.