So what is a forecast then and how does it differ?
A forecast looks the same as a plan or budget and you’ll create them in pretty much the same way as a plan or budget. But, a forecast is different from a budget, because it is your latest expectation of what really will happen over the next few months, based on what is happening in your business now.
Forecasts are where you are actually going, and are really beneficial if you amend them every month. If you use them wisely, forecasts will be the major tool in ensuring you never run out of cash.
Think of this analogy:
Forecasts are like a ship’s radar. Instead of telling you where you want to go, which is what your budget does, forecasts tell you where you are going.
To continue the ship analogy, the captain’s plotted course may show him that he wants to sail around a distant headland; however the ship’s radar may tell him that he is heading straight for the headland. What the captain wants to happen and what is going to happen are quite different. He needs to be aware of this so he can take corrective action.
Similarly your budget may show that you intend having, say £300,000 (or £30,000, or whatever the figure is) in the bank six months from now, but your forecast may tell you that you are likely to have only £125,000 (or perhaps £10,000, or minus £20,000) if things continue as they are.
Every month you need to take a look ahead to see what’s coming up, so you can spot potential obstacles and avoid them, rather than sailing straight into them.
Running your business without a budget is like getting in your car and driving with no idea of where you are going or where you want to go. You are aimless. Running your business without forecasts is like putting a blanket over your car windscreen. You can’t see where you are going, or what is in front of you.
(Source: Financialpreneur – thank you!)
The information in a forecast can be used to take immediate action. A budget, on the other hand, may contain targets that are just not achievable, because the market has changed in some manner externally or the business may have KPIs that have not been met. Perhaps you should at least update your budget more than once a year so it at least bears some sort of relationship to the current picture.
In short, a business always needs a forecast to reveal its current direction, while the use of a budget is not always necessary.
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