Budgeting and Forecasting: What are the differences and why they matter
If you're like many small business owners, you may think that forecasting and budgeting are one in the same; however, you'd be wrong. No matter the size of your business, it's essential to have an accurate forecast and budget as both work together to help you reach the ultimate goal of financial prosperity.
But while both are equally important - budgeting and forecasts are two completely different financial beasts. A budget is a plan you build out to determine how you want your business to grow. While it doesn't predict what will happen, it outlines what you want to happen. A forecast predicts and takes into consideration what your financials will look like in the months to come.
Definitions are great, but let's dig into some of the main differences between budgeting and forecasting and why should some build them into your business place starting right now.
What is Budgeting?
Your budget is a roadmap your business uses to reach its final destination. In other words, it shows you what you want to accomplish in the upcoming fiscal year - and how to get there.
Budgets are usually created once a year — the end product showing your companies current financial position, cash flow, and goals by estimating expenses and revenue needed to keep your business fiscally sound. Budgeting establishes a benchmark your business can measure its progress and performance against.
Why Budgeting Matters
Your budget is your business plan. It shows where you want to be in the next year, three or even the next five. Without a budget, it will be hard to measure your success. Establishing a budget and sticking to it is a great way to make sure your team is invested in the things that will make you successful, and that you are making progress towards your goals.
Budgeting Best Practices
Now that you are ready to build out your budget, there are a few things you should consider.
Project realistic future cash-slow
Your revenue projections will fuel a lot of this, but you can never be sure that your predictions will materialize - so try to be a bit conservative.
Differences between essential and non-essential expenses
Rent, electricity, salaries? All are essential in running a successful company. Weekly in-office Starbucks and flying first-class - not so much.
Cut Yourself Some Slack
Make sure you give your business some cushion when incorporating cash reserves into your budget. A little extra can make all the difference if things get rocky.
What is Forecasting?
Think of forecasting as a guide to help you reach the goals you've laid out for your business. It provides you with a data-based take on where your business is headed - which helps you adequately prepare for what's to come. Your budget is built around these predictions, allowing you to rest easy since you're prepared for whatever is to come.
Why Forecasting Matters
Your forecast gives your business wings. Fueled by real-time data, your forecast keeps your predictions grounded in reality so you can make smarter business decisions. Unlike budgets, your forecast helps you react and adjust for changes. Perhaps you forecasted growth based on one large client, but things didn't go quite as planned. You can quickly adjust your forecast to make up for the loss.
Forecasting Best Practices
Things change fast. Make sure you’re prepared for what can happen.
Keep Moving Forward
When it comes to forecasting, you need to stay on top of it. Make sure you are regularly checking in with key stakeholders and updating your forecasted spending throughout the year.
Think About All Possible Outcomes
You can develop several forecasts to reflect a range of possibilities. From the optimistic to the pessimistic - prepare for your business for every possible problem or setback. Always make sure you are prepared for what life throws at you.
Is your business ready for success?
While the difference between budgeting and forecasting may seem more significant than you might have thought - both are essential aspects of safeguarding your business.
So, now what? Make sure you have the right tools in place to understand where your business is and where it is going. And, if you're still confused about how to prepare your business for the future, reach out to our team of accountants and controllers who can streamline your continuing business growth.