Do you know which is better for your small business: forecasting or budgeting?
Business forecasting and budgeting are both important tools that any company or can use to help increase its revenue. Business forecasting is a strategy that looks at the future demand of a product and helps estimate how much will be needed, while budgeting focuses on what has been spent in past periods. In this blog post, we'll explore the differences between these two strategies so you can decide which one might work best for your business!
What is, and why do you need, a business budget?
In the words of Futrli CEO & Founder Hannah Dawson:
- A business budget provides a blueprint for your company’s desired success, and an accurate measure of how it is performing, year-by-year
- Budgeting is the starting point for (what we believe to be) an even more important measure of success, your cash flow business forecast; a vital piece of financial scenario planning for any company.
Budgeting ensures that you always have enough money for the things you need. It shows where you intend to go with your company, but are often quite rigid. It’s a static point A to point B direction. A baseline for comparison between actuals, it’s a really important part of your business planning, so check up on it and your progress regularly.
What is, and why do you need, a business forecast?
- A business forecast is all about now. It can be referred to and relied upon to help make business and operational decisions, eg staffing adjustments.
- It’s a real-time log of your activities, which allows you to make business decisions with confidence.
Likewise to the budget, you need business forecasting when running your business. The core difference is your business forecast updates in real-time. Your business forecast helps you navigate past obstacles, as you’re armed with constantly updating financial information about your business.
A forecast is a more forward-looking and dynamic measure of success. It shows where you want to go with your company in terms of income, by using budgeting as a starting point. Then we allow things like cash flow forecasts or marketing plans into the equation, for example; what if you had an unexpected expense? What would happen then?
So, which is better – a budget or business forecast?
We strongly advise you use both. This is because, simply, budgeting lays out your plan for where you want your business to go, while forecasting shows where your organizations are actually headed and predict future.
They’re as important as each other, so don’t ignore either one. We can’t stress how critical to your business’ growth and wellbeing to set up both straight away – even if you’re at the startup level.
Forecasting will help you see where your business is headed, and what mistakes you need to fix or avoid. Plus, it’s a great way of keeping track of where your money goes.
Budgeting gives you the necessary framework for future planning – so if forecasting shows that in six months time we're in trouble and won't make profits, you know how to fix it
Both budgets and a business forecast are important because they take different roles in your planning.
“While budgeting and forecasting are different functions, they are not mutually exclusive of each other. In fact, a good business forecast feeds the development of a sound budget,”
Writes QuickBooks Online.
Setting up your planning, you’ll find working out your budget first will allow you to form a great forecast.