Budgeting and forecasting are important for the success of business as one is in a position to set targets for income and expenditure and they help him to meet those targets as time progresses. Most of the established businesses exercise this and usually have a specialised accountant who assists in budgeting and forecasting.
What is budgeting?
It is the process of planning to spend money over a particular period of time. Thus, the spending plan is called budget. When there is a spending plan then one is aware of in advance whether one would have enough money to do the things one would like to do. However, when one does not have enough money, one can choose to spend on the things of priority that are really important to him.
What is forecasting?
Financial forecasting is a process of estimating or predicting the future performance of a business. Sales goals and targets are taken into consideration.
Both budgeting and forecasting are also used individually yet it is recommended that they be clubbed together and be used so that financial planning and analysis could be better understood.
A forecast is prone to alteration. However, a budget does not change and has to remain the same. Such tools come handy as they restrict companies from overspending and running out of cash.
Given below are the reasons that make budgeting really important and also mentioned are the advantages of having a cash flow forecast:
Early identification of risks so that they do not turn into something serious
Business evaluation is done by an important process called as financial forecasting which in turn lets us see the profit and loss statement. Capital funding or any significant financial investment would be harder to gain in case the business entity fails to prove that it is profitable or that it would become profitable in future.
Planning and Predicting cash flows
Many are the benefits of cash flow forecasting. One is that it guarantees enough cash for operation is always available. Many companies fail because they fall short of money to pay for their bills, staff, or suppliers.
Managing sales pipeline and performance tracking
Full transparency is needed in learning if the sales team is doing good or not and whether the conversion rate is high or not. And who is the best performer and why. If it is known what is to be improved, then you need to have a clear action plan to do so.
Show potential investors
It is important for investors to make an informed decision. Gaining funding is directly proportional to a robust financial planning. If the financial planning has a higher accuracy, then the chances of gaining funding increases.
Many things, regarding budgeting and forecasting, need to be understood clearly. The first thing to remember is that the budget should be put in place before the start of financial year. And it should be fixed for at least a quarter and no revision of it should be ideally done before the end of that quarter. The smaller businesses may update and rewrite their budget quarterly and the bigger businesses are the ones those usually maintain their annual budget intact. The whole point of this is to provide sales targets and restrict expenditure, to keep one sincere while spending money for business growth.
Running a Budget Variance Report needs to be done each month to determine the actual outcome against the targets and the various results from the numbers need to be discussed and considered. For example, when there is a discrepancy in the sales as one team might be performing well and the other might be underperforming and hence have to be focussed more upon. Thus, it will help us to find out areas that require immediate attention as well help us to trace underperforming or overspending areas and assist in rectifying the issues before they blow out of proportion.
Forecasting too is similar to that of budgeting that is done at the beginning of the year but are open to revision as things alter. They are modified throughout the year as and when the understanding on the business function and channel changes. For example: When a big client is won then the sales pipeline is amended to show extra amount of money coming in each month for 12 months. Then the cost associated with discharging that work is updated and thus a renewed forecast is now available. The budget however remains intact.
Cash flow is the flow of money in and out of business as income and expenditure. Everyone wants a positive cash flow that is more money should be coming into the business than going out. Positive cash flow helps settle bills and can be used to invest in business growth.
Risk of ignoring Cash Flow
- Piling up too much of stock
- Payment terms might get longer
- It could lead to overspending
- One could end up overtrading
Monitoring Cash Flow
- Important to know where one stands with a cash flow statement that shows the movement of money in and out of a business over a period of time
- Understanding the reasons behind cash flow problem
- Keeping the cash flowing
- Having an alternative fallback plan to offset any financial crunch
- By managing growth
Management reporting is a detailed report of the actual year to date position and a full year forecast. It includes a Profit and Loss statement, cash flow statement and Balance Sheet.
Usually the business owners struggle to come up with non complex templates that are relatively simple to manage and maintain. Also, many a time business owners desire to review monthly budget variance report and amend the forecast and maintain proper cash flow. However due to their limited understanding they are not in a position to revise and hence concentrate their focus somewhere else. To have an effective and efficient functioning of business finances it is relevant and appropriate that this important feature of budgeting and forecasting, cash flow and management reporting be outsourced to professional experts in accounting. The UK has many such accounting professionals whose services can easily help in predicting the cash flow and the owner will never run out of money.