Any small business has its recurring expenses, like office rent, employee payments, and software. As business operations change from one year to the next, it can feel challenging to have enough cash on hand to handle all these expenses, as well as anything unexpected that can pop up. To ensure your business can continue to afford these expenses while staying healthy, many small businesses use budget forecasting tools and strategies to plan for their month, quarter, or fiscal year.
What is budgeting?
Budgeting involves the determination and extensive detailing of a planned level of expenditures, often broken down into various expense categories. A small business budget may be structured by cash or accruals, and it may have several timeframe components as well.
Most business budgets involve a monthly component spanning the calendar year, and a quarterly budget spanning three to five calendar years. Experts advise preparing a budget for a given fiscal year during the two months preceding the start of that fiscal year. A budget should also not be treated as an inflexible plan, as increased sales or an unexpected but necessary large purchase may require adjustment to spending in other categories.
What is budget forecasting?
Budget forecasting allows small business owners to predict growth and use their findings to decrease their budgets for certain expenses or develop strategies to boost sales and, thereby, revenue. A budget forecast considers information from a business’s historical data to guess future expected revenue and costs, as well as their expense categories. A proper budget forecast can thus be not just crucial, but convenient for developing a strong, feasible budget.
Why is forecasting important?
Budgeting and forecasting go hand in hand, making both vital for any small business. Forecasting allows you to do the following for your small business:
- Balance company finances
- Predict, and prepare for, revenue and loss
- Make vital business decisions that require money to be spent
- Anticipate business expenses
- Stay ahead of low inventory or stock
- Plan for new product success and performance
- Observe the impacts of recent marketing campaigns
In looking at these benefits, one major distinction between budgeting vs. forecasting becomes clear: Whereas developing a budget based on current assets may seem wise, forecasting accounts for your recurring business activities, expenses, and revenue to form a stronger picture of your business’s financial situation.
Seven ways to improve budgeting and forecasting
While every business may have different thoughts about how to forecast a budget, there are some general practices every business should keep in mind to improve budgeting and forecasting. In particular, these seven steps should help you improve your small business budgeting and forecasting practices and clarify the budgeting vs. forecasting divide:
1. Keep your budgeting and forecasting flexible
Keeping operations rigid should never be part of how to forecast a budget. Any small business owner knows that business operations constantly change throughout the year, quarter, or even in a single month. Though forecasting can help you shape a budget, remember that if circumstances require you to exceed preset spending caps, you can, and should, retool your budget to accommodate these changes.
2. Budget to your plan
When experts suggest budgeting to your plan, they mean you should be sure that your business expenses are based on actual revenue rather than revenue that might happen. When you budget according to your plan, you may be better prepared to observe the effects of new expenditures on your finances, and you may find it easier to address potential opportunities that even your budget forecasting couldn’t have predicted.
3. Implement rolling forecasts and budgets
Related to budget flexibility, use rolling forecasts and budgets in place of rigid ones to accommodate for changing present-day circumstances. This way, if your circumstances differ from what your budget forecast predicted several months ago, you can increase or decrease expenditure caps as needed. Rolling forecasts and budgets are also better for budgeting to your plan while keeping your company in line with your financial projections.
4. Be clear about your goals
When developing a budgeting forecast, it’s important to know your business goals for the month, quarter, or year. Without setting these goals, you may have difficulty allocating your resources to achieve these benchmarks. Clearly outlined goals also help you set the sales and marketing plans you need to get there, creating a forecast that serves your business well.
5. Communicate clearly and frequently
Even in the smallest of businesses, there will be someone assigned to oversee spending in each department. You should clearly communicate your budget and forecast to these colleagues once you’ve prepared each item, and you should be prepared to do the same every time a budget or forecast change occurs. If your budget and forecast changes affect employees’ ability to write off certain costs as business expenses, you should be sure to let them know quickly and clearly as well.
6. Track everything
Every dollar in and out needs to be tracked. Not only does this help you plan for expenses as straightforward as office supplies, but it helps you put enough aside for the unexpected costs. It also means tracking external factors such as market trends, client needs, and anything you see your competitors doing that could impact your business.
7. Include profit and cash flow goals
Budgeting and forecasting are concerned with how your business will allocate its spending based on what your company needs to ensure a steady revenue stream. Budgeting and forecasting are, in turn, inherently concerned with profit and cash flow, so you should include profit and cash flow goals in your outlines.
Use past cash flow data – both cash flow into your business and out of it – to determine your anticipated cash flow for the month, quarter, or year. In turn, combine these cash flow predictions with your loss forecasts to nail down your profit. From there, you can adjust your budget to move closer to the profit you hope to achieve.
Additional forecasting resources
If the budgeting and forecasting processes seem overwhelming to you, know that you don’t have to go through them on your own. Several software products can assist with your projections, as can certain books. And if you find out that you might need to borrow money to stay in line with your budget, you can always contact SmartBiz Loans to apply for low-cost funds from banks.