Financial forecasting and budgeting both are the most important part of financial planning techniques that help business personnel in the decision -making in business. Budgeting provides the total amount to quantify the expectation of revenues a business wants to achieve in the future period,
If you own a small business, you might be knowing how forecasting and budgeting play an important role. In fact for a company of any size, they are two of the most important financial functions.
In general use, Some people may consider Forecasting and Budgeting as same, but they are not so. Here’s a guide to help you determine the differences between the forecasting and budgeting and how each can help to grow your business.
A forecast is an idea of what will happen at a higher level, generally key revenue items and overall expenses. Forecasts can be done over long-term and short-term based on time horizons. These can be done from top-down or bottom-up.
Forecasts as a Tool: ex
Here are a few things to consider when doing forecasts for your company:
- Consider using more than one forecast, perhaps three: one that reflects an optimistic outlook, one pessimistic and one most likely. This allows you to plan for growth but also to adjust in case some opportunities don’t materialize or happen slower than originally thought.
- Update your forecast on a regular basis.
- Involve key members of your team, such as managers from sales and operations. They are often closest to what is really happening. This will provide better information and keep these key managers involved in the process.
A budget is a complete financial outline of what the company thinks will happen over a period of time (often a year) financially. The budget will include details about the company’s revenues like as expenses, cash flow and financial position. This information should be available from your business financial reports.
- In smaller companies, the owner alone or with the help of a few key employees handle there budget.
- The process and time frame to complete the process are likely shorter in these cases.
- Most budgets are static and set for the company’s fiscal year. Still, some organizations use a constant budget, adept at the time the year based on changing business conditions. Although this can add efficiency, it also needs close concentration and may not necessarily yield a better outcome.
Budgets as a Tool:
Ideally, a budget is used as a management tool to run the business. Actual financial results are compared to budgeted amounts, and variances are analyzed.
- Start with a realistic cash-flow projection. Your revenue forecasts will drive this in part, but they may not fully materialize. It is better to be conservative here.
- Differentiate between essential expenses like electricity and internet and your discretionary expenses that are not essential to running the company. These will vary from business to business.
- Build debt reduction, if you have any, into your budget.
- Try to incorporate cash reserves into your budget so any extra profits can serve as a cushion against a future downturn in business.
Budgeting is the financial planning that made by the business for its future commercial activities. On the other hand, the forecast is just an indicator of future flows and discharge of the business organization.
Both of these are financial planning tools that assist the senior management of the organization in the decision-making process.
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