Is Budgeting or Forecasting Better for Your Business?
Posted on 27th July 2017 in Business
Written by Freya Hughes
Cats or dogs? Early or late? Android or Apple? We’ve all whiled away afternoons pondering and playing ‘would you rather…’, albeit most of us did so as kids. We come up against decisions constantly as business owners, though these choices are a lot more serious than choosing your preference between cats and dogs, burgers and hotdogs, or whatever else tickles your fancy. When it comes to keeping your finances looking fancy, you might be tempted to choose a budget or a forecast to save you time and energy tracking both. In this blog we’re going to explore which is more important, and how each will impact your operations and bottom line.
Decision making is something many of us shy away from. This is usually when a person doesn’t have confidence in what they’re faced with. The decisions you make in your business can be life altering. The thing to remember here is that not everything is black and white. Sometimes it’s not a choice between two things, as a combination would serve you better. Remember that business that do have a plan seem to create a more accurate picture of annual projected income and controlled expenses. So if you’re trying to decide between a budget and a forecast, read on, as the answer might not quite be what you’re expecting.
What is, and why do you need, a budget?
- 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 forecast; a vital piece of financial scenario planning for any company.
Budgeting essentially ensures that you always have enough money for the things you need. They’re often created in spreadsheets around the end of the financial year, or when you’re just setting up shop. It shows where you intend to go with your company, though is comparable to the old roadmaps that lived in your car glove compartment. They’ll get you to your destination, but there will be a few stops to check you’re on the right track – and the inevitable backtrack. 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 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 a forecast when running your business. It may look similar to the former, but your forecast updates in real-time. If we continue with our roadmap analogy, your forecast is your GPS. You’re navigating the business world, and your forecast is allowing you to dodge problems and worry, as you’re constantly armed with current information about your business. We see it as a safety blanket – you can rest easy with the knowledge your finances are not only safe, but looking healthy and helping you work towards your goals.
Forecasts are also great to share with your team – and it’s a lot easier than sharing your budget – so you know everyone’s working towards the same goals. Your management team should use your forecast regularly and act on any problems that are highlighted by it. You may find that your budget contains some goals that are unachievable when the market turns. The budget must be updated and monitored closely if you decide not to forecast. If you need more information on the difference between budgets and forecasts, see here.
Would you rather… a budget or forecast?
While it’s your choice how you run your business, 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 the business is actually headed. They’re as important as each other, so you shouldn’t ignore either one. While it may be tempting to set your budget and think you’ll get around to setting up your forecast, we can’t stress how critical to your business’ growth and wellbeing to set one up straight away – even if you’re at startup level.
Businesscasestudies.co.uk makes an interesting point breaking down why both are important. “Forecasts are based on past experience, whereas budgets are based on active plans for the future,” they state. We disagree – both your forecast and budget should reflect your plans for the future (based on past experience). Using retail as an example, they break down costs: sales of 500 items a month at £5 each. If each product is bought at cost price of £2.50, the running cost is £1000 per month. This allows you to calculate the cash flow of your business and set it out in a chart. The ‘bottom line’ of each monthly column shows the forecast bank balance at the end of that month. A budget is more rigid than a forecast, as they explain, “a budget is a plan for the future set out in numbers dealing with quantities such as sales, costs and production.” So it’s your actual figures you’re working from with a budget, which doesn’t allow for external factors having an impact on your figures.
So we can see why both are important – 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 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.
We remember playing ‘would you rather’ as kids, and the rule was no answering ‘both’ or ‘neither’. Fortunately for everyone, this isn’t the playground, so be smart and ensure you’re using both regularly.