25 March 2024
A business’s ability to effectively budget and forecast is essential to its future growth and success. Projecting future revenues, expenses and cash flow can set your business up to anticipate challenges, set realistic goals and prioritise investments more effectively.
Budgeting and forecasting aren’t just exercises in number crunching. Instead, they provide invaluable insights into the trajectory of your business. According to AR Advisors Principal, Ryan Brown, ‘It gives you an insight into what you think your business is going to do over the next three, six or 12 months and it helps to back up your business plan by providing data for informed decision making.’
So, what is the difference between budgeting and forecasting?
Budgeting is essentially about setting your financial goals and allocating resources to achieve these goals within a specified timeframe. Your budget accounts for your income and expenditure and guides the day-to-day operations of your business. Forecasting on the other hand looks at predicting future trends and outcomes based on past data, market conditions and other relevant factors. It looks at the opportunities, risks and challenges that may impact on your business.
Building an effective forecast
For businesses yet to implement a forecast, Ryan suggests doing it immediately and to take a pragmatic approach by looking at historical performance and aligning it with your business goals. ‘History is the best thing to go by. Look at things like capital movements and any issues that may have taken you by surprise and then build in safety nets within the budget,’ he states.
Taking a big picture view ensures your forecasts aren’t just numbers on a spreadsheet but a guide to better decision making. Adding the safety nets to your budget will cushion your business against outside factors such as market trends and provide a buffer for financial stability.
Look beyond the profit and loss
When it comes to budgeting and forecasting it's important to take a holistic approach to your numbers, looking beyond the profit and loss (P&L) statement and reviewing your balance sheet and cashflow position to gain an understanding of your financial health. If you don’t, you may find yourself in a situation where your P&L looks great but due to external factors your debt has increased along with your ability to service that debt. This could add an additional strain on the business and your balance sheet is struggling to keep up despite your healthy profit. Issues like these can lead to financial instability and hinder your ability to make informed business decisions.
Understand your business drivers
Understanding business drivers such as productivity and gross profit margin is essential for projecting revenue and expenses accurately. As Ryan emphasises, ‘Your gross profit margin is the most important number in any business. If you understand your gross profit margin, then you will know what is driving your revenue.’ Ryan believes your best strategy is to start with getting your gross profit margin right, ‘If you understand your margins, then 90% of your budget is done. Other factors tend to be quite predictable. Overheads can be massaged over the year, and you can cut back on costs but if you don’t get your margins right, you could be jeopardising your financial stability.’
Another driver that could be affecting your business are your own personal goals and aspirations. Ryan advises aligning financial objectives with personal aspirations, bridging the gap between professional success and individual fulfillment. ‘You need to understand the drivers outside of the business so that you know what goals inside the business need to be met,’ he suggests.
Be agile
While setting budgets at the beginning of the year is common practice, businesses need to remain agile and responsive throughout the year to adjust with market shifts and economic conditions. Ryan stresses the need for agile processes that allow for regular reforecasting based on quarterly performance, ‘You need to have the understanding and flexibility around your business so if you want to reforecast, it’s easy to do.’ Businesses that are reforecasting quarterly are more likely to stay on track to achieve the long-term goals from the strategic plan.
Sometimes the best thing you can do for your business is to hire someone with the expertise to handle the finances for you. A business advisor can help you take control of the big picture, while you keep your business running smoothly.
Is your budget and forecast up to date?
If your business could benefit from having a dedicated person on your team to help manage the budget, forecast and cash flow and provide advice on the bigger picture, schedule a free consultation with one of our Advisors by calling 9321 3362. Contact us to find out more.
Business Risk Assessment with AR Advisors
If your business would like some help identifying key risk areas to help with your budgeting and forecasting, we recommend taking our free Business Risk Survey. For help with strategic planning and risk management contact one of our advisors or visit our website to learn more about the Virtual CFO services we offer SMEs.