No matter what type of business you’re running, budgeting and forecasting should be terms you know just as well as accounting. Both are crucial for the success of any business. While they both deal with your business financials, they are different in how you use them as a business owner. This article will explain the uses for each and why they are so important.
Most business owners are aware of the need for budgeting. Budgeting entails planning out every expense your business will incur over a fiscal year. A budget includes accessible cash flow to cover costs, as well as expected revenue. Budgets are typically reviewed once a year near the end of a business’ fiscal cycle. End-of-year budgets are reviewed to determine whether a company came in at, over, or under budget. This evaluation establishes whether your business has made a profit, suffered losses, or broke even. In addition to the overall financial health of your business, budgets can be assessed for specific categorical losses and gains to determine areas of your business that are succeeding or failing.
The Importance of a Budget
Any company that plans on being in business longer than a month needs a budget. Your budget sheet will tell you exactly where the money is going and how it will come in. You’ll prepare for expenses such as electricity, rent, inventory, employee salary, and tax allocations. Without a budget, you’ll be flying in the dark and unaware of where cash is going. A lack of budgeting opens the doors for embezzling, dishonest employees, and practically guarantees failure as a company. Using a budget to plan out every expense is the most critical thing you can do for your business.
Forecasting is both a financial and operations tool used by business owners to plan out the long-term sustainability of their company. Business owners use forecasts to estimate staffing needs, inventory and stock supplies, and production.
Whereas businesses generally set a budget once a year, forecasting can be performed multiple times a year. If, for example, you will be losing a client because your contract is coming to completion, your inventory and staffing may need to be adjusted downward. If, on the other hand, you just signed on a new client who will double your production levels, you’ll need to increase staffing and inventory. Forecasting should be completed regularly and specifically when significant changes occur within your business.
The Importance of Forecasting
Forecasting is essential for the week-to-week and month-to-month outlook for your business. Using this tool allows you to adjust to significant events that impact your daily operations. Without this tool, you’ll be guessing when determining whether you have enough staff to handle increased output, inventory to process orders, and supplies to keep your workplace functioning smoothly. Also, if you’re applying or a bank loan, the bank will often want to see both your budget and your forecast. If you provide a loan institution a forecast detailing expected growth during the period of your loan, their underwriters will be more likely to grant your request.