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Article:

The Budgeting and Financial Forecasting Process Explained

01 April 2020

Why are budgeting and financial forecasting so important to the successful day-to-day management of your business? Below, we introduce you to both these key levers and provide a quick overview of BDO’s budgeting and forecasting services.

Our Scenario Approach to Forecasting

Financial forecasting helps business owners assess the impact their decisions will have on the cashflow and profitability of their business. BDO’s team of business advisers use a scenario approach to forecasting. This helps you understand your main profitability drivers, allowing you to focus your efforts on the areas of the business that will produce the greatest return.


What is scenario forecasting?

The scenario approach assists you when considering the risk, rewards, and timing of investment decisions. It will help you determine your ongoing cash needs and working capital requirements. It will also help you develop credible, three-way forecasts. A three-way forecast links your profit & loss (income statement), balance sheet, and cashflow projections together so you can forecast your business’s future cash position and financial health.

Above all, BDO’s scenario approach will help you work on action plans for enhancing the overall profitability of your business.

 

The Basics of Budgeting

Budgeting, along with its trusty companion forecasting, is about accurately estimating how much money your business will spend compared to how much it will generate. Ultimately, they help you plan to make a profit. They show how much money you need to get started, how many sales you need to cover costs, how much you can reinvest in the business, and when you can afford to hire new people.

Your profit and loss (P&L) statement and balance sheet are the two most common components of your budget. They reveal whether you’re making any money. However, a cashflow forecast is also important because it predicts how much money you’ll have in the bank at any one time, based on when you expect to be paid and when you must pay your bills and staff and loans.

Many new businesses will run short of money at some point. A cashflow budget helps you see when dry spells are coming so you can plan around them.

Some of the most common budgeting mistakes occur when businesses fail to allow for freelancers and contractors, transport, interest on loans, insurance, wastage, taxes and depreciation, and other expenses.

 

How do budgets and forecasts differ?

A budget is a plan for where you want your business to go. A forecast is where it is going based on what’s happened in the past. If you’re a start-up business, your budget and forecast will be the same, as they use the same set of estimates and assumptions. However, as the business progresses and you gather data around sales and costs, you’ll get a better idea of business performance and you can modify your predictions. This is called “reforecasting”.

Over time, your forecast and budget will begin to look different – only coming together again when you do your next budget.

 

Comparing your budget and forecast with reality

Good budgeting and forecasting rely on a regular reality check, otherwise known as the “actuals”. The actuals compare the assumptions of your budget with what’s actually happening. The actuals give you a clearer indication of how accurately your forecasting processes are working.

At the very least, keep a mental score of budget vs actuals throughout the year. After a while, you’ll be so familiar with the numbers that you’ll quickly notice if you’re straying off course. If you are, for better or worse, then it’s time to produce a new forecast.

 

Get help from budgeting & forecasting professionals

Suitable online accounting software platforms can make budget creation quicker and easier, or you can enlist the aid of the most trusted team of accountants that NZ has to offer. BDO’s industry-leading advisory services include comprehensive budgeting and forecasting to help you craft an accurate roadmap for business success. Contact BDO’s team of budget and forecasting specialists today and learn how we can back your business success.