Budgeting & Forecasting

What is Budgeting and Forecasting?

Budgeting and forecasting are fundamental financial practices for any business. Together they assist you in managing cashflow, acquiring and maintaining equipment, paying creditors and staff, reinvesting earnings and covering operational costs. Creating a budget and generating forecasts is essential for a financially healthy business.

What is budgeting?

A budget is essentially a prediction of expenses, revenue and overall financial position, usually over a period of a year (though some businesses create quarterly budgets or biannual budgets). A detailed budget will cover items like rent, utilities, staff salaries, taxes, equipment maintenance and all other payments required to keep the business running. These will be balanced against predicted revenues to ensure that the financial obligations of the business can be met. If a budget is created properly and stuck to (and the predicted revenue comes through), the business will end the year in a healthy financial position.

In larger companies or businesses with a large variation in yearly income, budgets may be adjusted over time to reflect the actual revenues coming in, which may necessitate cutting certain non-essential expenses or reinvesting extra earnings (whichever the case may be).

What is forecasting?

Forecasting is related to budgeting, but takes a higher-level view. Forecasts typically look at key revenue streams and the overall expenses, along with predicted outcomes of business development elements (such as the introduction of new products, ongoing staff development and business growth).

A long term forecast looks out over a period of several years. These are essential for creating business development plans and strategic business plans. A forecast will look at the current profit of a business and the return on its invested profits to determine how much profit it will make in the future and how much those profits will generate in return. In addition, a forecast may look at the development timeline and costs associated with creating new products, and the predicted revenues once that product is introduced. Forecasts are an essential part of 5-year plans and exit plans.