Set Your Business Up for Growth With Forecasts and Budgets
Originally published on March 14, 2022
Updated on July 17th, 2023
Forecasting and budgeting can help your business stay on track, grow in value and weather uncertainties down the road. But these tools sometimes go unused as business owners focus on day-to-day operations. Pausing to look at your past and present sales data and the state of the market helps you predict the future financial health of your business, simplifies your decision-making and paves the way to increased profits and growth.
James Moore partner Mike Sibley breaks down the basics of integrating forecasts and budgets into your business plan.
What is forecasting?
Forecasting is the process of analyzing your revenue, expenses and marketplace trends. This enables you to more accurately estimate how much money your business may earn in a particular period, mitigate market shake-ups and lay the groundwork for big purchases and future expansion. Forecasts can also help your business attract investors and secure loans.
While a forecast reveals a company’s possible future, a budget lays a roadmap for how to get there.
Step One: Make a strategic plan.
Before undertaking a forecast or designing a budget, it’s crucial to create a strategic plan for your business that defines and outlines your goals. Without one, your business may lack a clear direction.
It's much like going on a family trip; you don't just get in the car without packing bags or filling up the car with gas and knowing a destination. A strategic plan helps you in staying aligned with where you originally intend on going and helps you actually get to those destinations along the way. It also enables you to decide what you’re not going to do and pinpoints your focus on your business’s core advantages in the market.
While making a strategic plan can seem daunting, the process becomes more manageable when broken into smaller parts.
“I'm a big proponent of setting your annual goals and then breaking it down into chunks of ‘Here's what we need to accomplish this month. Here's what we need to accomplish to meet our goals for the first quarter and then the second quarter,’” Mike said. “That way you've got something manageable that you can accomplish throughout the year.”
Step Two: Make a financial forecast.
When you have a strategic plan in place, you’re ready to make a forecast and an annual budget. Forecasting and budgeting offer metrics for determining whether you’re on track to meet your goals and give you tools to help analyze the effectiveness of your strategy execution.
Short-term forecasts encompass a year of business, outlined month by month. Mid-term forecasts, on the other hand, cover three years and are divided by year. It’s important to forecast your cash resources to ensure you have enough money for payroll, raw materials and payments to vendors. Your annual budget should outline how your business’s finances will change as you carry out your strategic plan.
Step Three: Lay the groundwork for growth.
Forecasting can also reveal whether you have enough capital to make investments such as purchasing new equipment or facilities. A precise forecast helps you time your decisions well to minimize risk and stress – particularly during the gap between paying out larger sums of money and receiving returns from your customers.
For example, let's say you need to build a new manufacturing facility or purchase a new piece of equipment. Knowing when that's going to come in your long-term plan gives you the lead time to determine where your financing is coming from. You can figure out whether you be able to pay for it through internally generated cash flow, or if you'll need to go to external markets (through the bank market or private investors) to bring in capital to finance your purchase or project.
In manufacturing companies, raw materials, inventory and work-in-progress, combined with accounts receivable, are key to your working capital management on the asset side of your ledger.
Without a forecast, businesses run the risk of investing in growth too soon or being caught short if an unexpected challenge arises. Using a forecast to time major purchases and balance available cash with credit can help buffer a business from potential hazards down the road.
Step Four: Allow for unexpected detours.
Forecasting inherently involves a measure of uncertainty. It’s a process of making an informed guess about business metrics such as sales growth, cash flow, expenses, startup costs for new businesses and predictions of future demand.
While no forecast is perfect, the goal is to have a sense of “mostly right.” Unexpected distractions, such as a highly talented potential hire that isn’t quite what your company needs, can veer you away from your company’s core mission.
A forecast can help align your actions with your priorities to keep these distractions from derailing your plan. However, if things do go wrong, take time to stop and evaluate: What happened, and how can you incorporate what you’ve learned in your plan going forward?
Step Five: Invite input from managers.
While these principles can apply to businesses of all sizes, an important factor for midsize and large companies is to invite managers at the table. This increases accountability and a sense of ownership — two factors that help prevent a habit of placing blame elsewhere.
Empowering managers to make decisions within the scope of your strategic plan increases engagement. Your annual budget should provide managers with guideposts for evaluating where their division is and what they can do.
From a leadership perspective, it can be scary to push down decision-making into your organization. But the returns can be far above and beyond what you might expect, because it leads to a more engaged workforce. This leads to better decision-making, as the right people are making the decisions.
Step Six: Keep your eyes on the road.
Remember the fundamental purpose of forecasting and budgeting – to give you the information you need to make sound business decisions. The value of the forecast is not the forecast itself. It’s the information it provides you to help make good decisions to run your business.
And don't forget the value of someone who knows that road. Hiring an experienced CPA to help guide your forecasting and budgeting efforts gives you access to their expertise, insight and resources.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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