Budgeting and forecasting are essential to keep any business resilient, profitable, and prepared for both unforeseen opportunities and emerging issues – just ask any of our outsourced Finance Directors and other Finance professionals.
But it’s more important now than ever. Why? Because in times of economic uncertainty and instability like those we’re currently living through, there’s a greater likelihood of getting blindsided by changing circumstances.
In short, when you’re steering the ship through difficult waters, you need to be able to see both icebergs and safe passage from afar – and that’s the longer view that budgeting and forecasting affords.
But what does it entail, and how do you go about doing it properly to protect your business in these trying times?
Budgeting vs. forecasting – what’s the difference?
First off, it’s important to understand both the similarities and differences between budgeting and forecasting, because one is not effective without the other.
Both are forward-looking and both serve to set and steer the direction and performance of the business and inform critical business decisions.
But whilst a budget is typically built annually on a set of assumptions about what sales your business might reasonably expect to make, and the resources needed to deliver them, a forecast is a more frequent review process (often monthly or quarterly), and essentially serves as an ongoing correction to the budget.
It takes into account new data and developments, both positive and negative – as well as any evidence that the assumptions on which the main budget was based are no longer valid – and models the variance they introduce into the budget.
From this, more effective business decisions can be taken, to minimise risk, head off potential crises, and exploit hidden opportunities.
And guess what – the current financial climate is rich in all of these. So, where do you need to focus your budgeting and forecasting activity in particular? And where can you get help if you’re struggling?
Projections that matter most right now
A budget is a detailed representation of the future results, financial position, and cash flow that you want your business to achieve during the year.
No budget should be without all these elements, and in particular the cash flow scrutiny, as poor management of this is responsible, according to Dun & Bradstreet research cited by accountancy software provider Xero, for 90% of business failures in the UK!
But in uncertain and volatile times, it’s forecasting that becomes especially critical in identifying changes that need to be made to cash flow and other areas, and decisions that need to be taken to keep the budget on track.
Here are just a few factors your forecasting needs to consider:
- Additional funding – Covid taught us a lot about how lost revenues and increased costs made the availability of additional funding a critical watch-out for business resilience and continuity, and current conditions continue to send that message.
Rising energy and fuel costs, interest rate instability, supply chain turmoil, inflation, geopolitical disruption – a timely forecast can provide a clear idea on if and when you’ll need to make arrangements to secure additional funding to counter these threats.
- Changes to your business’s strategy – Forecasts can yield valuable insight into new strategies that will enable your business to remain resilient. Forecasting that captures internal insight from sales and other functions, as well as market research and economic intelligence, can highlight opportunities to target profitable new and additional sectors, as well as to price, package, and bundle products and services more effectively. Missing these tricks can leave you wrongfooted by a budget that seemed sensible at the time but couldn’t flex with the changing market.
- Impact and outcome modelling – In an economic environment where there is no shortage of impactful challenges, forecasting enables you both to model their consequences and gauge the outcomes of decisions you might take to address them.
What happens to your loan repayments if interest rates increase, and what changes do you need to make to mitigate the effect on your cash flow and reserves? How would making redundancies to cut our costs affect your ability to carry out your core business? How could (say) invoice financing help to strengthen cash flow and offset spiralling energy and other costs?
There’s more detail in our article here, but to paraphrase General Eisenhower, there’s having a plan (the budget) and there’s managing the plan (the forecast), and it’s an inseparable double-act.
Budgets and forecasts: what shape are you in?
Budgeting and forecasting can be a complex exercise, and it’s often difficult for small organisations with limited Finance resources to stay on top of it whilst looking after what matters most – their core business.
Luckily, we’re here to help, with outsourced FDs, CFOs, and other Finance professionals who can give you as much or as little help as you need, over as many or as few hours as you require.
Because when it comes to getting your budgeting and forecasting in order, in today’s climate there really is no time like the present.
For more information on how EFM can help you with budgets and forecasting, contact one of our EFM experts.