A budget forecast can provide you with valuable insight into your company’s financial health. You can use this information to make wiser decisions about spending and investing. It is also important to know how you can use forecasts to make better decisions in the present and to understand that there are many different ways you can predict the future of your company’s financials! Understanding how cash flow forecasts work and how best to use them could help prevent unfortunate circumstances arising in businesses. Unfortunately, some businesses and business managers do not possess the sound financial understanding needed to make critical and far reaching corporate decisions often leading to significant losses.
Budget Forecasts are forecast of a company’s projected income and expenses over a number of future years. If you’re curious about what your company is making for the future or wondering how your company would do if it had to cover all its costs and still stay in business, budget forecasts provide insight into the answer.
Different companies have different budgeting meetings where they discuss their profit margins, customer demand levels, supplier rates, and whether they can continue at their current level or will have to up their game. Most businesses consider this information when deciding whether it is worth investing more money in a new product line that may take longer than expected to develop.
How Do Budget Forecasts Work?
Budget forecasts typically happen at the beginning of the year and cover a time period ranging from six months to five years. They are usually presented at a meeting where representatives from different departments are invited to attend. Each person brings specific information about their department’s expenses and income, which is then compiled into an overall summary for the company. Your company’s budget forecast is based on your company’s financial history (if you’ve had previous years of success), common industry standards for expenses, market analysis and any other research that sheds light on how much revenue your company could make in the future.
What Does a Budget Forecast Look Like?
A budget forecast is usually presented in the form of a spreadsheet that has a column for each month and several rows with specific amounts of income, expenses, or company profit. Because most budgets use the previous year’s numbers as a basis to project how your future will be, you will see the same numbers repeated in your budget forecast if you are using your company’s actual financial information. The last two columns of your budget sheet will show projected income and expenses (and are often based on the same information that you used to create revenue and expense budgets). For example, if your company’s sales revenue was $1 million last year, but your company projects $1.5 million in annual sales for the coming year, you will see $1 million in sales from last year repeated in the first two columns of your spreadsheet. You can then add a column that shows the difference between last year’s sales numbers and the projected growth, or subtracting $500,000 from $1 million and projecting that $500,000 is your new income for next year.
How Do Budget Forecasts Affect Your Business?
Budgets are an important financial tool because they help you to plan for future expenses. If your company’s budget forecast is off by a significant amount over time, then you may have problems meeting other goals like paying off debt or keeping out of negative cash flow. When you know how much income and expenses you can expect over the next few years, you can make financial decisions that will benefit your company over the long term.
Budget forecasts are more useful in large companies where a single budget can show what multiple departments are doing. Small businesses may have less need for this, because they frequently operate on a smaller scale and don’t need to spend a lot of time projecting how their business will grow or how much money they’ll have five years from now. However, if you are considering expanding in the future or purchasing new equipment or supplies, then your company’s budget forecast may help you figure out if these moves would be profitable for you.
Types of Budget Forecasts
Budget forecasts are usually prepared by one person (or department) who has a good understanding of all the expenses and income in the company. This is a one-time job, not something that happens every month or year. You can have budget forecasts for many different departments or even for specific areas of your company’s business, like sales, marketing or production. The way your budget forecast is presented will depend on how much detail you want to include in it and whether it is for a general overview of the future or to help you make a detailed decision about what your company should do next.
If you want a detailed analysis of your company’s performance over the last several years, you can request that your budget forecast be reviewed by an accountant or other financial expert. Professional opinions are especially useful if you have a particularly unusual year like a good season with lots of sales, which may make it hard for your budget forecast to go down.
How Do Budget Forecasts Change?
As with other types of financial projections, your company’s budget forecasts can change if something unexpected happens during the time period covered by the forecast. New information from sales, staffing changes and any external market factors can all cause everything in your company’s budget forecast to change slightly or even dramatically.
If you know that something is going to change, plan ahead. For example, if you are relying on a specific supplier for a specific product or service, or if you frequently use a particular resource (like your intern or new employee), then double-check with whoever is responsible for dealing with that person and have them create separate spreadsheets for the employee next year. Set up a budget forecast meeting where all team members can discuss what they will be doing differently at the beginning of the year to accommodate these changing circumstances.
What Are the Different Types of Budget Forecasts?
There is a basic budget forecast that tracks income and expenses for your company as a whole for the time period covered (usually about five years). A sales budget may only be for one department, such as marketing. If you have more than one department, you can also have an operating budget that shows income and expenses for each of those departments. The last type of budget forecast is an inventory budget, which shows how much product you will need to keep on hand at any given time if your business relies heavily on inventory turnover. Your inventory budget is created based on historical data, market trends and demand trends in your industry.
How Does a Budget Forecast Work in Real Life?
If you are in charge of your company’s budget forecast, you need to learn how to create one that is accurate, but also realistic and something that your employees can easily understand. There are many different ways to put together a budget, so the first step is to decide what information you want. You should use the previous year’s numbers as much as possible, but if there were trends over the last few years or a big one-time event that changed things significantly, add new columns of income and expenses based on these influences. If you do this every year at the beginning of the budget planning process, your forecasts will become more accurate over time.
Your budget should be both realistic and something you own. If you will use it to set goals for yourself, your staff or your company, then make sure it is something that is useful and achievable. Even if lofty goals are needed to help your company grow and succeed, it’s also important to present a realistic picture of what might happen if things go well or wrong.
You can customize your budget forecast in many different ways. You can break down expenses by department, by product (or service) line, or even by individual employee depending on what you think is the most important for business growth.
If you have a seasonal business, like a retail store or landscaping business, you can also customize your budget forecasts. This is especially important if one month of the year has traditionally been better than others, because then you can adjust your sales and income assumptions accordingly. I once worked for a company that closed its retail stores for three months in the winter. They kept the inventory on hand because there was always something being sold by mail order or online. This eliminated the potential problem of having too much inventory on hand during slow months and made it possible to set important short-term goals based on what usually happened when sales were higher in each season.
Producing a budget forecast that is easy to understand and one that can be used by your employees is especially important in the beginning. Most employees do not have a background in accounting or in understanding how businesses make money, so they need the information to be presented in a way they can understand. Giving them a copy of your budget forecast could help you start the planning process for the year and set realistic expectations for what is possible for everyone.
How Do You Put Together Your Budget Forecast?
Once you decide what sources of income you will use, create rows and columns showing income sources. You can add rows and columns showing your expenses, growth goals, annual totals and future years. Add any notes to the margins that might be hard to fit into the columns. Most of your budget forecast will show year-to-year income and expense trends. Your overall budget forecast should give you a good idea of what has been happening in your company so you can put together financial plans for the future.
Creating a Budget Forecast
In most companies, once you have all of your information together and decide what information you want in your budget forecast, creating one is actually fairly easy if you know what to do. The first step is to list out your income sources in rows across the top of a spreadsheet or table. List out your expenses in columns beneath them. Most companies use a table to create a budget forecast, but spreadsheets are also used.
Next, you have to decide how far ahead you want to plan and do this in at least two different ways: columns for current year and rows for future years. Most companies also plan at least three years beyond the current year (or current season), but some businesses like to create budgets for five or more years into the future. The farther out you go, the less likely it is that everything will go according to your plan, so you might want to start with no more than three years of data.
There are many different options for creating a budget forecast. If you have been doing it year after year and have only modest growth, you can use what you did last year as the basis for creating this plan. Another way to go about it is to take the average of the past three years and then adjust it based on how your company has done in each of those years. Using a weighted average is another way to take all of that information into account.
If you want to be more flexible with how you create a budget forecast, try taking last year’s income and then multiplying that by 1 plus the change in income from one year to the next (or use numbers for two years ago if relevant). In this way, you are starting with the past and making adjustments based on what might happen in the future. Then, take your expenses, subtract them from income, and multiply the difference by 1 plus change in expense. This is an easy way to create a budget forecast that can be adjusted at any time throughout the year.
Once you have your numbers entered into a table (or spreadsheet), go through it and make sure that anything that should be a negative dollar amount is shown as a negative number. Most of your numbers will already adjust for this because of how they were created and entered, but check all rows individually just to ensure accuracy. Then, add up the rows to check and see if your income and expenses are balanced. If not, adjust the numbers until you get a positive total for your income and expense columns. Be sure to check both sides of the equation at the bottom of each row as you do this because sometimes mistakes happen in one column but not in another.
Once you have your budget forecast finished and it is balanced, double-check it. You can do this by looking at each row individually to see that the numbers add up correctly within each column (or row). Then, look at every column to make sure they all have the same amount above or below zero. If this is not the case, adjust one number so that all numbers are equal. If you find that your income and expenses do not balance, make note of this in your budget forecast and decide whether the problem will affect other important goals, like paying back debt or increasing the amount of money in the business.
How Do You Use Your Budget Forecast?
Once you have a budget forecast that is accurate information, save or print it for future reference. You will probably want to give each employee a copy at some point as well. Sometimes people think that budgets don’t matter, but they do because they provide a measurement of success and support everyone’s expectations for what can be expected from a given year based on their projections.
You can use your budget forecast to see how well you have planned for a given year, but in some cases, you will have to make changes and adjustments. If the result is that your budget forecast still does not balance (even after making all adjustments), then it is time to go back into the numbers again and make sure that everything adds up correctly. This might mean changing the amounts of some numbers or grouping certain expenses together.
Once you have created a budget forecast that works for you and could be used by others in your organization, it is important to make sure that it is accurate before using it to help set goals for the future. If you figure out how to create a budget forecast that works for you and your company, it is easier to take the next step and use it to help you make decisions about future growth. If you keep growing, you can always go back and update your budget forecast with new information.